SARFAESI & DRT: Few important issues under SARFAESI Act, 2002 - II?

We all know the object of SARFAESI Act, 2002. There was a need to enable the Banks to speedily recover their loans and by approaching Civil Courts earlier, they could not effectively recover the loans and as a result Banks doing business with public money were facing enormous problems. It was in this backdrop and based on the recommendations of the committees, the “Recovery of Debts Due to Banks and Financial Institutions Act, 1993” was enacted enabling the Bank to approach the Special Tribunal called “Debt Recovery Tribunal” to get a declaration as to the outstanding due from the borrowers and to get the declaration executed. This is all a special mechanism and everybody knows this. As the Banks could not reduce their Non-performing Assets (NPA) even after enacting RDDBI Act, 1993, based on the recommendations of the Committee, “Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” was enacted. Under the SARFAESI Act, 2002, Banks can follow a procedure to determine the outstanding due on their own and they will take such steps required in accordance with the Act in realizing their due. The procedure of making a demand by the Bank under section 13 (2) of the Act, entertaining objections, reply to the objections from the borrowers under section 13 (3A) within the prescribed time, taking symbolic possession of the property under section 13 (4), taking physical possession of the property/secured asset by taking assistance from the Magistrate under section 14 and conducting an auction of the property mortgaged in accordance with the provisions of the Act and rules, are well known now. The borrowers are provided with a right to appeal to the Debt Recovery Tribunal under section 17 of the Act if they are aggrieved at the action initiated by the Bank and the borrower can exercise their right of appeal as against any action by the Bank pursuant to section 13 (4) of the SARFAESI Act, 2002.

Though, the entire mechanism under SARFAESI Act, 2002 appeared to be clear, Courts had to interfere and deal with many complicated issues in the interests of the Bank and also the Borrower. I would say that, though there are some complicated issues even now, the Constitutional Courts did interpret the provisions of the Act well and many issues under the Act are now well settled. Few complicated issues under the Act in the past are as follows:

1. Is it mandatory for the Bank to reply to the objections raised by the borrower in response to the demand notice under section 13 (2)?

Now, it is mandatory to give a reasoned reply to the objections raised by the borrower and the Courts have rightly held in this regard. Under section 13 (3A), now, it is mandatory for the Banks to reply to the objections raised by the borrower within a time frame as prescribed.

2. Will the borrower loose his right to appeal under section 17 if he doesn’t prefer an appeal within 45 days from the date of receipt of notice under section 13 (4) of the Act?

This is really an important issue addressed by the Constitutional Courts. There was a confusion in this regard and now the Courts have consistently held that the borrower can question all the steps initiated by the Bank pursuant to section 13 (4). Borrower can question the ‘Sale Proceedings’ and can also challenge the order passed by the Magistrate Court under section 14 of the Act. Despite the clear wording in the provisions of the Act, the legal proposition in this regard is well settled now. This proposition is infavour of the borrower and it protects the rights of the borrower against the Bank.

3. Whether the High Court can interfere with the proceedings initiated by the Bank under the provisions of SARFAESI Act, 2002?

Definitely, there can not be any embargo on the jurisdiction of the Constitutional Courts under Article 226 of Constitution of India. However, in view of the object of SARFAESI Act, 2002 and availability of alternative remedy, the High Courts now consistently holding that the borrower is not supposed to come to High Court challenging the action initiated by the Bank under the provisions of SARFAESI Act, 2002. However, where the Bank is not correct clearly in classifying the account as ‘NPA’ which is preliminary to initiate proceedings under the provisions of SARFAESI Act, 2002, the High Courts do interfere with the action initiated by the Bank. Again, it depends upon the facts and circumstances of the case. The legal position in this regard is also settled to a great extent.

4. The powers of DRT under Section 17 of the Act?

Constitutional Courts have clearly held that the DRT has elaborate powers and it can even restore the possession back to the borrower in the event it find the action initiated by the Bank is illegal or incorrect. There is still confusion in my mind with regard to the powers of the DRT in adjudicating the due under section 17. One view is that the DRT can only look into the correctness of the procedure prescribed while entertaining appeal under section 17. The other view is that the Appeal under section 17 of SARFAESI Act, 2002 is like an original proceeding and the DRT can even adjudicate the due and can see the correctness in the outstanding due as arrived by the Bank. This requires little bit clarity in my opinion. On the issue of adjudicating the outstanding due under section 17, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487 has clearly held that the DRT can look all objections including the correctness in the outstanding due. In arriving at the conclusion, the Delhi High Court has also considered other landmark judgments of the various Courts including Supreme Court. The extract of the judgment of Delhi High Court as referred to is as follows:

“15. While we agree with the conclusion of the Full Bench in the Lakshmi Shankar Mills (P) Ltd. case however, we do not agree with the underlined observations in para 21 reproduced above that it is not necessary for the DRT to adjudicate the exact amount due to the secured creditor. In our opinion, this ratio of the judgment in the case of Lakshmi Shankar Mills (P) Ltd. (supra) seems to be in conflict with paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. & Ors. Vs Union of India & Ors. 2004 (4) SCC 311. The Supreme Court has clearly held in the case of Madia Chemicals Ltd. that the proceedings under Section 17 is in the nature of original proceedings and that even the amount which is claimed to be due to a bank/financial institution as stated in the notice under Section 13(2) can be challenged by the borrower. Paras 18 and 54 of the judgment in the case of Madia Chemicals Ltd. are relevant and the same read as under:-

“18. It is submitted that the mechanism provided for recovery of the debt under Section 13 indicated above does not provide for any adjudicatory forum to resolve any dispute which may arise in relation to the liability of the borrower to be treated as a defaulter or to see as to whether there has been any violation or lapse on the part of the creditor or in regard to the correctness of the amount sought to be recovered and the interest levied thereupon. On the other hand, Section 34 bars the jurisdiction of the civil court to entertain any suit in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. It also provides that no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act or under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Section 35 gives an overriding effect to the provisions of the Act over the provisions contained under any other law. The submission, therefore, is that before any action is taken under Section 13, there is no forum or adjudicatory mechanism to resolve any dispute which may arise in respect of the alleged dues or NPA.

54. Insofar as the argument advanced on behalf of the petitioners that by virtue of the provisions contained under sub-section (4) of Section 13 the borrowers lose their right of redemption of the mortgage, in reply it is submitted that rather such a right is preserved under subsection (8) of Section 13 of the Act. Where a borrower tenders to the creditor the amount due with costs and expenses incurred, no further steps for sale of the property are to take place. In this connection, a reference has also been made by the learned Attorney General to the decision in Narandas Karsondas V. S.A. Kamtam which provides that a mortgagor can exercise his right of redemption any time until the final sale of the property by execution of a conveyance. Shri Sibal, however, submits that it is the amount due according to the secured creditor which shall have to be deposited to redeem the property. Maybe so, some difference regarding the amount due may be there but it cannot be said that right of redemption of property is completely lost. In cases where no such dispute is there, the right can be exercised and in other cases the question of difference in amount may be kept open and got decided before sale of property.”

5. Powers of Civil Court in respect of the matters under SARFAESI Act, 2002?

The Courts have laid due emphasis on section 34 of the Act and discouraged Civil Courts to entertain or interfere in the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. But, Civil Court’s jurisdiction is not completely overruled out even now in view of the observations in the Mardia Chemicals case. Civil Courts continue having very limited jurisdiction in respect of mattes under SARFAESI Act, 2002. Where there is a fraud etc., Civil Court can interfere even in respect of the mattes under SARFAESI Act, 2002 and it is as per the observation in Mardia Chemicals case. However, another view is that the Civil Court will continue to have powers to entertain suits etc., in respect of the matters falling directly or indirectly under the provisions of the SARFAESI Act, 2002 and if a remedy before DRT is not available under section 17, then, the Civil Court can interfere and continue to have powers even in respect of the matters where the Bank has initiated action under the provisions of SARFAESI Act, 2002. It all depends upon the facts and circumstances of the case and there can not be any hard and fast rule in this regard.

6. Sale proceedings under SARFAESI Act, 2002?

Practically, many borrowers think of approaching Courts seeking relief only when the Bank take steps to auction the ‘Secured Asset’. It is because, the borrowers, in many cases, continue having negotiations with the Bank Officials and it will consume lot of time. It is only when the borrowers feel that they may not get their dispute or grievance settled with the Bank, then, they will approach the Tribunal or the Courts. This is a very difficult situation. On one side, the Banks are to be allowed to proceed with the sale proceedings and supposed to confer title on the successful bidder or purchaser. Because, no purchaser would be willing to purchase the property in the auction if there would be a rider over the title of the property even when the entire consideration is paid. Again, even if the bidder takes the risk and bids for the property, there is a chance that the property may fetch lesser value and the Banks may have to compromise with their rights at times or borrowers may be the losers in some cases as the residue of the sale proceeds comes to the borrowers. This continues to be the complicated situation and it is laudable that the Courts have interpreted the provisions of the Act even at this stage in favour of the borrower. The borrower is provided with a right to even challenge the sale proceedings and can exercise the right of redemption if he succeeds in his appeal under section 17 and if the sale gets set-aside finally.

Dealing with the sale proceedings under SARFAESI Act, the Delhi High Court in M/s. Ram Murty Pyara Lal & Others Vs. Central Bank Of India & Others, CDJ 2010DHC 1487, was pleased to observe as follows:

“17. In view of the above, we hold that the right of redemption claimed by the petitioners will depend upon success of the proceedings initiated by the petitioners under Section 17 of the SARFAESI Act. In case, the petitioners finally fail, then it will not have a right of redemption, however, in case the petitioners succeed in the proceedings under Section 17 and orders are passed for setting aside the auction sale in terms of sub-section (2) to (4) of Section 17, then in such a case, it will be open to the petitioners to claim right of redemption. The conclusion which emerges is this that in case the borrower succeeds in its petition under Section 17, then, the DRT can pass orders under sub-sections 3 and 4 of Section 17 cancelling the auction sale proceedings. In case, the auction sale proceedings are cancelled because the action of the bank/financial institution is found to be violative of various provisions of the SARFAESI Act and the Rules framed there under, it is possible that a fresh auction may have to be conducted. In case a fresh auction of the mortgaged property has to be conducted then, a fresh date will be fixed for auction sale and it is at that stage that again Section 13 sub-section 8 will come into play and at which stage, the borrower can seek to exercise its right of redemption of the mortgaged property. Therefore, everything will turn upon the success or failure of the petitioners in the petition under Section 17 of the Act when the same reaches finality. Presently, the stage of the proceedings under Section 17 is that, and as already stated above, the same has been dismissed by the DRT and a statutory appeal under Section 18 is pending before the DRAT. Therefore, if the petitioners succeed in its appeal under Section 18 before the DRAT, the petitioners can exercise a right of redemption because fresh auction sale proceedings may have to be conducted and when so required to be conducted, once again a date will have to be fixed for sale/transfer/auction and before which date, the petitioners can seek to pay all the dues of the bank in terms of Section 13(8) of the SARFAESI Act.”

Note: the views expressed are my personal and a brief of few points 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.