Bombay High Court: Challenge to recovery notice under SARFAESI Act to be dealt by Debts Recovery Tribunal

Bombay High Court: Challenge to recovery notice under SARFAESI Act to be dealt by Debts Recovery Tribunal

This would be subject to the situation that no fraud was committed

The Bombay High Court has held that once a secured creditor issues a demand notice under Section 13(2) of the SARFAESI Act, 2002, the Civil Court’s jurisdiction is barred. Thereafter, any challenge to the notice would come under the Debts Recovery Tribunal (DRT).

A Bench comprising Justice MS Jawalkar rejected a borrower’s civil suit alleging that the bank violated the Guidelines on Fair Practices Code for Lenders and Fair Lending Practices Code. The bank had classified the loan account as a non-performing asset (NPA) observing that the borrower could raise the grounds in defence in the bank’s recovery suit before the DRT.

The Court held, "The issuance of notice is the exercise of the power conferred upon the defendant/bank under Section 13(2) of the SARFAESI Act. Hence, the jurisdiction of the Civil Court is barred. As soon as this notice is issued, any challenge to the notice comes within the domain of DRT. The reliefs claimed in the suit come within the jurisdiction of DRT and not the Civil Court.”

It set aside the Trial Court’s order refusing to reject two civil suits by a borrower against the bank alleging that the bank acted illegally by not deciding the proposal for restructuring of loan accounts and violated the circulars of the Reserve Bank of India (RBI).

The borrower, Punya Coal Road Lines, availed various credit facilities from the Union Bank of India since 2010. From time to time, these were renewed and enhanced. By 2015, it was Rs.40 crores. The borrower mortgaged immovable properties to secure the loan. It committed default and in 2017, the loan accounts were declared as NPA. As on 30 November 2017, the due amount was Rs.20,36,06,163.24.

The bank initiated the recovery of its dues and issued a demand notice under Section 13(2) of the SARFAESI Act to make the outstanding payment within 60 days. The bank filed an application under Section 14 before the District Magistrate, Nagpur seeking assistance for taking the physical position of the mortgaged properties. Additionally, it filed a recovery suit for Rs.19,67,50,000 before DRT.

On the other hand, the borrower filed two suits in the Civil Court seeking damages from the bank. It alleged that the bank acted illegally by classifying the loan account as NPA and not sanctioning the proposal for restructuring of the loan account. It accused the bank of committing numerous illegalities in its dealings and violating the Fair Lending Practices Code guidelines for lenders.

The trial Court dismissed Union Bank’s applications seeking rejection of the borrower’s suits. Thereafter, the bank filed the present revision applications before the High Court.

The bank submitted that the Civil Court had no jurisdiction to entertain the suit once the notice was issued under the SARFAESI Act and the loan was classified as NPA. It argued that once it was done, the action under the Act must be considered as initiated, and as per Section 34, the Civil Court’s jurisdiction was ousted. The bank further stated in the entire plaint the borrower made no complaint of the bank playing fraud.

The Court cited the ruling of the Supreme Court in the Mardia Chemicals Ltd vs Union of India case, wherein it was held that Section 34 of the SARFAESI Act barred the jurisdiction of the Civil Court in matters in which the DRT was empowered to determine. However, if there was an allegation of fraud against the secured creditor, the Civil Court had limited jurisdiction to bring an action against the creditor.

In the civil suits, the borrower sought a declaration that the bank acted illegally by not deciding the former’s proposals for restructuring the loan, permitting holding on operation, releasing of mortgage properties, and classifying the loan account as NPA pending the proposals. This violated the RBI guidelines. It also sought direction to the bank to remove the loan account from the NPA classification and a permanent injunction restraining the bank from acting on the NPA classification.

Noting that the word ‘fraud’ was not used anywhere in the plaint, the Court stated that the borrower could raise all these prayers in the application filed by the bank before the DRT. Once the notice under the SARFAESI Act was issued, any challenge to the notice would come within the domain of DRT. Therefore, the reliefs claimed in the civil suit fell within DRT’s jurisdiction and not the Civil Court.

While rejecting the suits, the Bench observed that the Trial Court did not consider the effect of notice under Section 13(2), classifying the loan account as NPA and whether there was any pleading of fraud in the whole plaint.

At the borrower’s request, the Court granted a six-week stay on the judgment so that the borrower could file an appeal.