Getting relief from DRT under SARFAESI Act, 2002?

It would be clueless for the professionals at times in answering the queries of the borrowers facing proceedings under ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’. If the Bank initiates proceedings under the provisions of SARFAESI Act, 2002, then, in view of section 34, no Civil Court shall have jurisdiction to entertain any suit or legal proceeding in respect of the same subject matter. Though there can not be any such restriction in any act when it comes to High Court exercising jurisdiction under Article 226 of Constitution of India, the High Courts too may hesitate to look into the infirmities committed by the Bank under SARFAESI Act, 2002 and the Court may lay emphasis on the availability of ‘alternative remedy’ to the borrowers under section 17 of the SARFAESI Act, 2002. Section 34 of the Act is as follows:

“34. Civil Court not to have jurisdiction.- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”

Relief before DRT under section 17:

Initially, it is held by the Courts and followed by the Debt Recovery Tribunals that the Tribunal, under section 17, can only see as to whether there is any procedural irregularity in the action initiated by the Bank. However, now, it is settled, atleast as a legal principle, that the Debt Recovery Tribunal can look into all allegations or issues while entertaining an Appeal under section 17 and it extends to the issue of looking at the correctness of the amount/outstanding amount demanded by the Bank in its notice under section 13 (2). Courts have further held that the DRT has the power to restore the possession of the ‘secured asset’ back to the borrowers in appropriate cases. It all may appear good as a principle of law, but, the reality is different. If the borrower files any appeal under section 17, then, the DRT will look at the outstanding amount in the notice under section 13 (2) and insists for the deposit of 20 or 30% of the outstanding before granting any interim relief and this interim relief can only be for some time or till the disposal of the Appeal in some cases. It is alleged that the DRT emphasis on the amount demanded by the Bank rather the grievance of the borrower or borrowers.

What if borrower succeeds?

Again, even if borrower succeeds in his Appeal under section 17 of the SARFAESI Act, 2002, the borrower may not be happy. It is interesting. Because, the borrower might have clearly alleged or established that the Bank was at fault in adhering to the terms and conditions of the sanction and might have wanted the DRT to force the Bank to act upon the agreed terms. But, it will not happen and the DRT may simply set-aside the possession notice issued by the Bank under section 13 (4) of the Act and the Bank impliedly have an opportunity to start the proceedings afresh. There may not be any difficulty for a Public Sector Bank or the officers of the Bank to initiate proceedings against the borrower again and again. Like-wise, on some technical grounds, the borrower may succeed in his Appeal under section 17 of the SARFAESI Act, 2002, but, it would be interesting to understand as to what that means. That may be nothing at times unless the borrower is interested only in getting some time to repay the outstanding amount. It is felt that the Debt Recovery Tribunal can grant no relief to the borrowers under section 17 except asking the Bank to start the proceedings afresh.

High Court/Civil Court’s jurisdiction:

In view of the Bar under section 34 of SARFAESI Act, 2002 and in view of the composition of Tribunal, the Tribunal should have all powers to adjudicate the claim and to issue suitable directions to the Bank or suitable relief to the borrowers. The High Court can be issuing various directions to the Bank in a SARFAESI proceeding if it chooses to entertain any Writ Petition under Article 226 of Constitution of India. Why can’t it be done by the Tribunal also? In view of the settled practice, as many say, before the Debt Recovery Tribunals and in view of the fact that the borrower needs a forum to agitate his grievance, it is impossible according to me to say that ‘no civil court shall have jurisdiction’ or impossible to confine the jurisdiction of Civil Court in cases only when there exists ‘fraud’ etc. Civil Court shall have jurisdiction in deciding disputes between the Bank and the borrower unless there exists an ‘Arbitration Clause’. Just because, the Bank initiates the proceedings under the provisions of SARFAESI Act, 2002, it can not be a Bar on the Civil Court or the High Court under Article 226 and it all depends upon the facts and circumstances of the case.

Why there can’t be suitable compensation:

There exists a provision in the SARFAESI Act, 2002 that the borrower should be compensated if it is proved that the Bank is at fault in a proceeding under the provisions of SARFAESI Act, 2002. While section 19 of the Act deals with the issue of payment of costs and compensation to the borrowers; section 32 of the Act protects the action taken in good faith. Section 19 and section 32 of the Act are as follows:

19. Right of borrower to receive compensation and costs in certain cases. – If the Debt Recovery Tribunal or the Court of District Judge, on an application made under section 17 of section 17A or the Appellate Tribunal or the High Court on an appeal preferred under section 18 or section 18A, holds that the possession of secured assets by the secured creditor is not in accordance with the provisions of this Act and rules made thereunder and directs the secured creditors to return such secured assets to the concerned borrowers, such borrower shall be entitled to the payment of such compensation and costs as may be determined by such Tribunal or Court of District Judge or Appellate Tribunal or the High Court referred to in section 18B.

32. Protection of Action taken in Good Faith- No suit, prosecution or other legal proceeding shall lie against any secured creditor or any of his officers or manager exercising any of the rights of the secured creditors or borrower for anything done or omitted to be done in good faith under this Act.

When there exists a fault on the part of the Bank, the borrower should suitably be compensated under section 19, but, in reality, it is not happening and it should happen.

Courts to the rescue of borrowers:

While resisting to entertain the Writ Petitions under Article 226 and 227 in respect of SARFAESI matters as many believe, the Courts have always tried to make the proceedings before the Debt Recovery Tribunal meaningful. The Courts made it clear that the Bank should apply its mind in disposing of the objections raised by the borrower under section 13 (3). The Courts have held that the DRT has all powers under section 17 and the DRT can entertain appeals challenging any proceeding of the Bank pursuant to the issuance of notice under section 13 (4) of the Act. Thus, Courts have done its best to make the Debt Recovery Tribunals really effective.

Unless there is a course correction as to how the Tribunals deal with the Appeals of the borrowers under section 17, it is very difficult to stick to the principle that the Civil Courts and the High Courts should avoid interfering in SARFAESI proceedings initiated by the Bank.

Note: the views expressed are my personal.

Author:

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

DRT & SARFAESI: RBI guidelines on NPA and its interpretation?

It is very important for the Banks to deal with the ‘will defaulters’ and to reduce ‘NPA’ in the interest of the Banking Industry and in the interest of the country too. There were constant efforts to enable the banks to speedily recover the dues from the borrowers. Bank could not recover their dues effectively by approaching Civil Courts and as a result ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993” was enacted. Under the RDDBI Act, a Special Tribunal called ‘Debt Recovery Tribunal’ was established and the Banks could file an application under section 19 of RDDBI Act seeking a ‘Certificate of Recovery’ against the borrowers and this ‘Certificate of Recovery’ is like a decree passed by a Civil Court. The DRT need not follow Civil Procedure Code while entertaining the application filed by the Banks under section 19 of RDDBI Act, 1993 and there was a special mechanism for execution of the orders too. Even with this RDDBI Act, 1993, Banks could not achieve considerable results forcing the legislature to think further effective mechanism to recover the dues and as a result and based on the recommendations of the committee ‘The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (SARFAESI Act) was enacted. Under the SARFAESI Act, 2002, the Banks need not approach any Court or Tribunal to get the dues of the borrowers determined and to proceed against the ‘Secured Asset’. Under the SARFAESI Act, 2002, if an account is classified as ‘NPA’, then, the Banks can proceed to recover the dues. Under the said Act, the Banks will give a demand notice to the borrower and guarantor under section 13 (2) of the Act and the they will deal with the objections of the borrowers to the demand notice and if the objections of the borrowers are overruled, then, the Bank will proceed taking symbolic possession of the property, taking physical possession of the property and then will dispose of the same in accordance with the provisions of the Act and connected rules. Under SARFAESI Act, 2002, there is no need for the Banks to approach any Court or Tribunal for recovery of their dues and they may have to get the assistance of the Magistrate Court under Section 14 of the Act while taking physical possession of the property where there is a resistance in taking the possession.

If the borrower is aggrieved at the action initiated by the Bank under SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal under Section 17 of the Act by paying the prescribed fee. Many legal issues under SARFAESI Act, 2002 were now settled. The important issues dealt by the Courts under SARFAESI Act, 2002, are, according to me, as follows:

(a). At what stage the borrower can approach the Debt Recovery Tribunal challenging the action initiated by the Bank?

(b). Can the borrower challenge the notice issued by the Bank under section 13 (2) of SARFAESI Act, 2002?

(c). The jurisdiction of High Court under Article 226 of Constitution of India in dealing with SARFAESI matters?

(d). The powers of the DRT and as to whether the DRT can look into the correctness of the ‘outstanding due’ arrived by the Bank?

(e). Can the DRT order the restoration of possession if it is proved that the Bank is not right in proceeding under the provisions of SARFAESI Act, 2002?

(f). Is it right to say that the DRT can only look into the procedural irregularities while entertaining an Appeal filed by the borrower under Section 17 of the Act?

(g). The issue of deposit to be made to the DRAT while preferring an Appeal against the final order of the DRT?

(h). The nature of guidelines issued by Reserve Bank of India?

(i). The jurisdiction of Civil Court in respect of SARFAESI matters?

(j). Can the Bank simply reject the objections raised by the borrowers under section 13 (3A) of the Act?

These are the few important issues, the Constitutional Courts have dealt with so far laudably and all these are, infact, directed towards protecting the interests of the borrowers and without disturbing the object of SARFAESI Act, 2002. There were many complaints from the borrowers that the Bank is unreasonable in proceeding against them under SARFAESI Act, 2002 and many say that they are not the willful defaulters and the action of the Bank affects them severely. It is settled that the RBI guidelines on ‘Asset Classification’ are mandatory and not recommendatory. RBI does frame and update the guidelines dealing with ‘Classification of Assets’ from to time keeping in view of various issues. A reading of the RBI guidelines appears to be very fair and infact, the guidelines enables the Bank to exercise their own fair judgment on many issues. The RBI guidelines on ‘Asset Classification’ are specific on certain issues and on many other issues, it emphasize the need for not troubling the good borrowers or the bonafide borrowers. I have also seen guidelines that the Banks should not rely on technical deficiencies if the record of recovery of Account is good. Likewise, the RBI guidelines on ‘Asset Classification’ appear to be fair and the question is with regard to interpretation of the guidelines. It is now clear that it is mandatory for the Banks to follow the RBI guidelines in classifying an account as ‘NPA’. The Banks are infact, supposed to have their own clear internal mechanism to deal with the ‘Non-performing Assets’. However, most of the Banks may have their own administrative machinery to make use of the provisions of SARFAESI Act, 2002 and they will proceed to classify an account as ‘NPA’ relying on RBI guidelines.

I had to focus on a very specific guideline of the RBI saying that the Bank should proceed ‘borrower-wise’ and not ‘facility-wise’. However, I have came across some incidents where the Banks proceed with ‘borrower-wise’ at times and proceed with ‘facility-wise’ at times. If it is facility-wise, the Banks may have to issue so many demand notices and there is no need in issuing so many demand notices to the same borrower. There is logic behind RBI guideline as I understood. The RBI guidelines appears to be very fair and it has even dealt with the issue as to what happens if the borrower is very good in meeting the commitments in respect of so many facilities and if there is a slight deviation in respect of one facility. If the Bank proceeds ‘borrower-wise’ in these cases, then, the ‘borrower’ will suffer irreparable loss. While emphasizing the object of ‘speedy recovery of dues’, while framing clear guidelines on certain issues, RBI guidelines expects the Banks to exercise their own reasonable judgment on their own.

What if an ‘Account’ is classified as ‘NPA’ wrongfully and what can the borrower do in these cases? I have seen some cases where the High Court did entertain Writ Petitions when the classification of account itself under challenge clearly. But, if the borrower is asked to approach the Debt Recovery Tribunal challenging the action of the Bank at a later point of time and when the Bank issues a notice under section 13 (4), then, the borrower, if he is genuine, may have to suffer irreparable loss. There will be Paper Publication of the factum of taking symbolic possession and it can affect the reputation and credit worthiness of the borrower in the market and the even if the borrower approaches the Debt Recovery Tribunal under section 17, there may not be much emphasis on the issue of exercise of discretion by the Banks in classifying the account as ‘NPA’ and the borrowers, in most of the cases, are forced to make some deposit and the Tribunal says it is to get the ‘bonafides’ proved. The Debt Recovery Tribunals should function effectively and when there is a prima facie case and when it appears that the Banks are unreasonable in proceeding against the borrower, an interim relief can be granted to the borrower and even the borrower can be asked to regularize his account or continue making payments as committed originally. But, what happens normally is that the borrower will be spending huge expenses for paying Court Fee and for paying legal fees and even then, the relief is not guaranteed.

Though the RBI guidelines say that the Banks need not consider the value of ‘Secured Asset’ while classifying the account as ‘NPA’, the DRT can consider many issues while granting interim relief. But, initially, it was settled that the DRT can only look into the irregularities in proceeding against the borrower under the provisions of the Act. Now, the scope of powers of DRT under section 17 was expanded and the DRT can look into various issues and can even look into the correctness of the determination of ‘outstanding due’.

It is true that there can be borrowers who try to delay the payment as committed to the Banks, but, it is also to be noted that the Banks too can be unreasonable to the genuine borrowers at times.

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

SARFAESI & DRT: Legal position under section 34 of SARFAESI Act, 2002?

I was concentrating and writing on few complicated issues under SARFAESI Act, 2002. I was also writing that there was no clarity on the issue of jurisdiction of Civil Court in entertaining SARFAESI matters in view of clear bar under section 34 of SARFAESI Act, 2002. There was a reference in the Mardia Chemicals case on the issue of Civil Court’s jurisdiction and a very limited jurisdiction of Civil Courts in respect of ‘Secured Assets’ is upheld. It is a very interesting and also a very complicated area to deal with. If Civil Courts entertain suits affecting the action initiated by the Banks under SARFAESI Act, 2002, then, it is likely that the object of SARFAESI Act, 2002 may get affected. On the contrary, there may be a genuine grievance which can not be granted by the DRT under Section 17 and under such circumstances, one may resort to Civil Court seeking remedy. Complete ouster of jurisdiction of Civil Court under Section 34 of SARFAESI Act, 2002 is not possible in view of the scope of section 17 of SARFAESI Act, 2002 which deals with the powers of DRT while entertaining an appeal by the borrower or any other person. It is true that the scope of section 17 is expanded from time to time and even the rights of the borrowers are well protected as he can question all actions now pursuant issuance of notice under section 13 (4) without bothering much at the limitation. The proposition that the DRT can even restore the possession back to the borrower in appropriate cases is being implemented now very frequently and in many cases.

When it comes to the jurisdiction of DRT and Civil Court in respect of SARFAESI matters, there can be a problem with simultaneous proceedings based on the same ‘Secured Asset’. How to address these issues will remain to be interesting till we get clarity in this regard. If it is an issue of Civil proceeding and Criminal Proceeding on the same cause, then, it is settled that the a finding in a Criminal Court need not bind the Civil Court in a Civil proceeding. But, if DRT and Civil Courts are allowed to entertain appeal and suits on the same ‘Secured Asset’ in appropriate cases, then, the effect of one proceeding over the other is complicated and it requires clarity. I have had the privilege of reading a wonderful judgment of High Court of Bombay at Nagpur dealing with the complicated issue of Civil Courts jurisdiction under Section 34. It was a wonder judgment giving clarity on the issue to some extent and even the judgment referred to leaves the question of effect of one proceeding over the other without any answer. Given the limitations, the judgment as referred to, summarize the issue of Civil Court’s jurisdiction under section 34 of SARFAESI Act, 2002. The relevant portion of the judgment of Hon’ble High Court of Bombay at Nagpur, in State Bank of India Vs. Shri Sagar s/o Pramod Deshmukh & Others, CDJ 2011 BHC 176, is extracted below:

“17. Section 34 of the said Act deals with the ouster of the jurisdiction of the Civil Court, the same being relevant is reproduced below:

“Civil Court not to have jurisdiction.-- No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted to any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 (51 of 1993).”

Bare perusal of Section 34 shows that the jurisdiction of the Civil Court is specifically barred to entertain any suit or proceeding only to the extent of the matters, which the Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under the said Act, to determine.

18. Once it is admitted that the suit property has in fact been mortgaged with the Bank or Financial Institution, then it cannot be disputed that the “security interest” is created, as defined under Section 2(z-f) of the said Act in favour of a “secured creditor”, as defined under Section 2(z-d) of the said Act in respect of the suit property. The secured creditor thereupon, becomes entitled to enforce its secured interest without intervention of the Courts or the Tribunals, in accordance with the provisions of the said Act and the Rules framed thereunder, as stipulated under sub-section (1) of Section 13 of the said Act and the jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act, springs in. However, even if the property in respect of which security interest is found to be created in favour of a secured creditor, that by itself will not be enough to oust the jurisdiction of the Civil Court to decide other disputes in respect of such secured assets. The jurisdiction of Civil Court to decide the suit involving such other disputes in respect of secured assets, is barred only to the extent of the matters, which the Debts Recovery Tribunal or its Appellate Tribunal is empowered by or under the said Act, to determine. The Debts Recovery Tribunal is a Court of limited jurisdiction, which cannot be enlarged beyond the examination of validity of the action of a secured creditor under Section 13. All other disputes in respect of secured assets, which do not fall within the jurisdiction of the Debts Recovery Tribunal under Section 17 or its Appellate Tribunal under Section 18, the Civil Court continues to exercise its jurisdiction. Similarly, even if the jurisdiction of the Civil Court is not barred under Section 9 of the Civil Procedure Code to decide other disputes in respect of secured assets, that cannot encroach upon the right of a secured creditor under Section 13 of the said Act, to enforce his security interest in respect of such property and the jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act, to protect such security interest of a secured creditor remains exclusive to the extent of the matters provided for under Sections 17 and 18 of the said Act. Hence, a line of demarcation in this respect is required to be drawn to define the compact area of jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act. In order to decide the question as to whether the jurisdiction of the Civil Court under Section 9 of the Civil Procedure Code is ousted or not, the real test would be to find out whether the Debts Recovery Tribunal under Section 17 of the said Act is empowered to hold an enquiry on a particular question and to grant the relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 of the said Act shall decide the extent of exclusion of the jurisdiction of the Civil Court to decide the dispute in respect of the suit property.

19. Any person, including the borrower, aggrieved by any such action taken by the secured creditor under Section 13, can file an objection before the Debts Recovery Tribunal under Section 17 of the said Act. If it is found by the Debts Recovery Tribunal that the recourse taken by the secured creditors under sub-section (4) of Section 13 is in accordance with the provisions of the said Act and the Rules framed thereunder, then it has jurisdiction under sub-section (4) of Section 17 to see that the secured creditor is entitled to take recourse to one or more of the measures specified under sub-section (4) of Section 13 to recover its secured debts, notwithstanding anything contained in any other law for the time being in force. In such situation, the normal jurisdiction of Civil Court cannot be invoked to defeat the rights of secured creditor under Section 13 and to arrest the jurisdiction exercised by the Debts Recovery Tribunal under Section 17, in view of bar of its jurisdiction created under Section 34 of the said Act.

20. So far as the action of secured creditor is concerned, the Debts Recovery Tribunal exercises the jurisdiction of superintendence under sub-section (3) of Section 17, to see that the secured creditor acts only in accordance with the provisions of the said Act and the rules framed thereunder, to enforce its security interest and that it neither does exceed its jurisdiction nor acts in breach or non-compliance with the provisions of the said Act and the rules thereunder. The jurisdiction of the Debts Recovery Tribunal under sub-section (3) of Section 17 is akin to the jurisdiction of Civil Court, as has been held by the Apex Court, in Mardia Chemical's case and it also extends to protecting the interest of borrowers or any other person against any such illegal acts of secured creditor, by directing such secured creditor to restore the management or possession of secured assets to the borrower and to pass such order as it may consider appropriate and necessary in relation to any of the recourse taken by the secured creditor under sub-section (4) of Section 13. While exercising such jurisdiction, the Debts Recovery Tribunal can also adjudicate upon the questions whether security interest was in fact created in respect of any property or part thereof in favour of a secured creditor, or whether creation of such security interest in favour of secured creditor was legal, valid and proper, or that the measures taken by the secured creditor under sub-section (4) of Section 13 of the said Act are in accordance with the provisions of the said Act and the Rules framed thereunder, or even the question whether any bank or financial institution or any consortium or group of banks or financial institutions claiming itself or themselves to be secured creditor/s, are in fact the secured creditors in respect of any property or part thereof. The jurisdiction of Civil Court to decide all such questions is barred by Section 34 of the said Act.

33. In view of above, the sum and substance of the decision is that:

(i) The jurisdiction of the Civil Court to entertain, try and decide any suit or proceeding in respect of the property, which is the subject matter of security interest created in favour of a secured creditor, is barred only to the extent of the matters, which the Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under the Act to determine. (Para 18)

(ii) The jurisdiction of the Civil Court in respect of the matters, which do not fall within the jurisdiction of the Debts Recovery Tribunal or its Appellate Tribunal under Sections 17 and 18 of the said Act, is not ousted or barred under the provision of Section 34 of the said Act and the Civil Court continues to exercise such jurisdiction. (Para 18)

(iii) In order to decide the question as to whether the jurisdiction of the Civil Court under Section 9 of the Civil Procedure Code is ousted or not, the real test would be to find out whether the Debts Recovery Tribunal under Section 17, is empowered to hold an enquiry on a particular question and to grant relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 shall decide the extent of exclusion of jurisdiction of Civil Court to decide the dispute in respect of the suit property. (Para 18)

(iv) The jurisdiction of the Civil Court to entertain, try and decide a civil suit challenging the action of the defendant no.3-Bank to take possession of the suit property and to sell the same to recover its debts by enforcing security interest in the suit property in accordance with the provisions of Section 13 of the said Act, is completely barred by Section 34 of the said Act. (Paras 19, 20 and 23)

(v) The jurisdiction of the Civil Court to entertain, try and decide the suit for partition and separate possession of the property in respect of which security interest is created in favour of secured creditor, is not barred under Section 34 of the Act. (Para 21)

(vi) The jurisdiction of Civil Court to entertain, try and decide the Civil Suit claiming relief of declaration that the action of the secured creditor to take possession of the property and to sell the same, is fraudulent and void, as has been held by the Apex Court in Mardia Chemical's case, is not barred by Section 34 of the said Act. (Para 23)

(vii) The jurisdiction of the Civil Court to entertain, try and decide Civil Suit simpliciter for permanent injunction to permanently restrain the defendant No.3-Bank from taking possession of the suit property and selling the same or to create any third-party interest without any substantive relief of declaration that the creation of security interest in favour of a secured creditor was fraudulent and void ab initio, is completely barred under the second part of Section 34 and hence consequentially, the jurisdiction of Civil Court to pass an order of temporary injunction in such suit, restraining the defendant No.3-Bank from alienating the suit property or creating any third-party interest therein, is also barred. (Para 25)

(viii) Once it is held that the jurisdiction of Civil Court is not ousted under Section 34, to grant substantive relief of declaration that creation of security interest in favour of a secured creditor was fraudulent and void, its jurisdiction to grant consequential relief of permanent injunction and the relief of temporary injunction in such suit, is not ousted. (Para 26)

(ix) Once it is held that the jurisdiction of the Civil Court to entertain, try and decide the civil suit for partition and separate possession of the suit property is not barred by Section 34 of the said Act, then it follows that the jurisdiction of the Civil Court to grant permanent and temporary injunction restraining the defendants from dealing with the suit property or creating third party interest therein is also not ousted by Section 34 of the said Act.

(x) It is open for the plaintiffs or any other person having any right, title, share or interest in the suit property to lodge their/his objection under Section 17 of the said Act before the Debts Recovery Tribunal, which is competent to deal with it in accordance with law and to pass such orders as are necessary to protect the interest of the plaintiffs/such person vis-a-vis the suit property and also to balance the equities. (Para 30)

(xi) The question as to what shall be the effect of a decree passed in the suit for partition and separate possession of the suit property or for declaration that the action of secured creditor is fraudulent and void ab initio by the Civil Court, on the enforcement of security interest by the defendant No.3-Bank, i.e. the secured creditor, can be determined only after culmination of both the proceedings and not before. (Para 30)”

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

DRT & SARFAESI: Approaching High Court and Civil Court may prove to be costly in SARFAESI matters?

The jurisdiction of High Court and the Civil Courts in respect of action initiated by the Bank under the provisions of SARFAESI Act, 2002 is almost settled now. There should be a careful understanding and interpretation of the legal position in this regard. There are judgments of Supreme Court and High Courts emphasizing the need of exercising due care while entertaining Writ Petitions under Article 226 of Constitution of India in respect of SARFAESI cases. However, it doesn’t mean that the High Courts should not entertain any Writ Petition under Article 226 of Constitution of India in respect of SARFAESI cases. Depending upon the facts of each and every case, the High Court may come to a conclusion as to whether to entertain a Writ Petition or not in respect of SARFAESI cases. There was a practice of filing Writ Petitions earlier in respect of SARFAESI cases and even High Courts used to entertain such Petitions. However, there is a consistency in this regard now and the High Court will normally hesitate to entertain Writ Petitions in respect of SARFAESI matters under Article 226 of Constitution of India in view of clear alternative remedy under section 17 of SARFAESI Act, 2002 before the Debt Recovery Tribunal. The issue as to whether the remedy before Debt Recovery Tribunal is effective or not is a different issue altogether. In many cases, the borrower or litigant used to get an interim stay of SARFAESI action in his Writ Petition under Article 226 of Constitution of India, however, the Writ Petition will soon gets dismissed. This is what happening now when a litigant/borrower approaches the High Court challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002. It is settled legal proposition that a Writ Petition under Article 226 of Constitution of India is not maintainable where there is an efficacious alternative remedy. Cleverly, in all cases, it may be contended that though there is an alternative remedy, the same is not efficacious. These contentions are not accepted normally except in exceptional cases warranting the High Court to exercise its extraordinary jurisdiction under Article 226 of Constitution of India. Why litigants approach the High Courts frequently in respect of SARFAESI matters is that it is not costly filing a Writ Petition and there is a need to pay a Court Fee when a borrower/litigant approaches the Debt Recovery Tribunal under section 17 of SARFAESI Act, 2002. Again, there will be lot of work pressure in High Court and if once a Writ Petition is entertained or admitted, it will take lot of time to look at the matter again and to dispose of the case. However, the practice is different now in respect of SARFAESI matters and even the Bank takes due precaution in defending Writ Petitions challenging the Bank’s action under the provisions of SARFAESI Act, 2002.

On the same footing, the litigants/borrowers do approach Civil Courts challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002 despite the clear bar under Section 34. There is confusion and there are complications in this regard. The jurisdiction of Civil Court is not completely overruled in respect of SARFAESI matters and limited jurisdiction is upheld even in the land-mark Mardia Chemicals case. Despite ruling in favour of limited jurisdiction of Civil Courts, it is really difficult to maintain a Civil Suit before a Civil Court in respect of SARFAESI cases. Again it is very difficult to rule against the Civil Court’s jurisdiction based on the Bank’s reference to the provisions of SARFAESI Act, 2002. It all depends upon the facts and circumstances of the case.

The borrower/litigants may not be able to get an effective remedy under the provisions of SARFAESI Act, 2002 before the Debt Recovery Tribunal and Debt Recovery Appellate Tribunal. There may be lot of work pressure before the DRT and DRAT, they may not understand the seriousness at the grievance of the borrower in some cases and it may be attributed to the work pressure in most of the cases. That is why; many Writ Petitions and Petitions under Article 227 of Constitution of India were filed even in respect of cases which are pending before the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal under the provisions of SARFAESI Act, 2002. When the litigant/borrower approaches the right forum as provided in the statute and then approaches the High Court on the ground that the remedy is really not efficacious, then, the High Court may give directions to the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal. It can not be said that the borrower/litigant is always wrong and Bank is always right. There are serious allegations against the Bank Officials too in many cases and there are allegations at the manner in which the Bank conducts the auctions or sells the ‘secured asset’ through Private Treaty.

The litigants/borrowers may not be aware of the legal position and technicalities. Many feel that the Bank will be automatically restrained if the borrower approaches the High Court by filing a Writ Petition or files Civil Suit before a Civil Court. Its not at all true and the borrowers may actually be prejudiced by approaching the High Court and Civil Court without approaching the Debt Recovery Tribunal or Debt Recovery Appellate Tribunal when they have a grievance at the Bank’s action under the provisions of SARFAESI Act, 2002. For example, the litigant/borrower may have a very good case against the Bank and despite having good case; the borrower might have chosen to file Writ Petitions and Civil Suit. The Bank proceeds under the provisions of SARFAESI Act, 2002 despite the pendency of Writ Petitions and Civil Suit unless there is a specific restraint order. There may be a finding in the Writ Petition or the Civil Suit against the borrower that he approaches the High Court with wrong intention despite having clear alternative remedy under section 17 of SARFAESI Act, 2002. All this attitude of the litigant/borrower may work against the litigant/borrower despite the fact that he has a genuine grievance against the Bank. This is what happening in most of the cases today. The litigant/borrower keep on approaching High Court or the Civil Court and in the meanwhile the Bank proceeds with completion of the procedure in proceeding against the ‘Secured Asset’ under the provisions of SARFAESI Act, 2002. Then, it would be difficult for the litigant/borrower to turn the clock back and to explain as to why he did not approach the Debt Recovery Tribunal under Section 17. The litigant/borrower may also plead at the professional advice and may claim that he has acted as per the professional advice, but, those issues are not considered at all by the Courts except in exceptional cases.

Thus, the borrower should be very careful in raising his grievance against the Bank and a wrong approach may really cost him a lot.

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

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.