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3/1/11

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 ofCivil 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 ofCivil 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.

2 comments:

  1. I am amazed at your research and writing skills.lots of regards gor you ability to explain such ckmicated , not so explored subject with such ease and beauty. advocateriturawat@gmail.com

    ReplyDelete
  2. Sir, can u please send me in PDF format. Amazing sir.

    ReplyDelete