Bar of Jurisdiction under Section 34 of SARFAESI Act

Almost every Special Legislation comes accompanied with a bar of jurisdiction, curtailing the powers of the Civil Courts to entertain the dispute which is determinable by the provisions of the Special Legislation. This article will examine the statutory bar of exclusive jurisdiction contained in Special Legislations with emphasis upon the bar envisaged in Section 34 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 [“the SARFAESI Act”] and whether dehors the statutory bar of exclusive jurisdiction, the Civil Court would still have jurisdiction to entertain the dispute or not.

Statutory Framework at a Glance

The SARFAESI Act was enacted essentially to provide a speedy mechanism for recovery of debts by banks and financial institutions. Section 13 of the Act enables the Secured Creditor or the Bank to issue a notice to the defaulting borrower to clear the dues within a period of 60 days failing which the Bank is entitled to take possession of the Secured Asset(s) of the borrower under Section 13(4) of the Act. Thereafter, the Secured Creditor may proceed to auction off the Secured Assets of the borrower in order to recover the loan amount. If the Secured Creditor is unable to realize the entire loan amount after sale proceeds of the secured assets, then under Section 13(10) of the Act, the Secured Creditor is entitled to file an application before the Debt Recovery Tribunal [“the DRT”] to recover the balance amount. Section 17 provides a redressal to any person including the borrower to approach the DRT by making an application, challenging the action of the Secured Creditor/Bank taken under Section 13(4) of the Act. If the DRT, after examining the facts and circumstances of the case, is of the opinion that the measures taken by the Secured Creditor/Bank under Section 13(4) are not in accordance with the provisions of the Act, then the DRT is empowered to make the following orders under Section 17(3)of the Act, depending upon the facts and circumstances of the case-

Declare the recourse to any one or more measures referred to in sub-section (4) of Section 13 taken by the Secured Creditor as invalid; and
Restore possession of the secured assets or management of secured assets to the borrower or such other aggrieved person, who has made an application; and
Pass such other direction 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.

If upon adjudication of the Section 17 Application filed by the borrower, the DRT returns a finding that the possession of assets of the borrower by the Secured Creditor was not in accordance with the provisions of the Act and restores possession of the Assets the borrower, under Section 17, then the Borrower is entitled to such compensation and costs as may be determined by the DRT or the court of District Judge, under Section 19 of the Act.

The DRT, therefore, is empowered to adjudicate the aforesaid matters under the provisions of the SARFAESI Act.

Exclusive Jurisdiction

Section 34 of the Act places an embargo upon the Civil Courts to entertain any suit or proceeding in respect of any matter which a DRT is empowered to determine under the Act. Section 34 of the Act is reproduced hereinbelow-

“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 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 Banks and Financial Institutions Act, 1993 (51 of 1993).”

Does the Civil Court have jurisdiction to entertain suit, dehors the statutory bar of Section 34?

In Central Bank of India vs Smt. Prabha Jain & Ors.¹ Plaintiff’s brother-in-law illegally sold her share of the land which she inherited after the demise of her husband, to one Parmeshwar Das who obtaining a loan amount from the Appellant/Central Bank to fund the transaction and mortgaged the said land with the Central Bank. Parmeshwar Das defaulted in repayment of loan amount due to which the Appellant/Central Bank took possession of the land under Section 13 of the SAFAESI Act and placed the land for auction in order to recover the loan amount. In order to set aside the sale, the Plaintiff instituted a Civil Suit seeking following reliefs-

Declaration that the sale deed executed in favour of Parmeshwar Das is illegal.
Declaration that the mortgage deed executed by Parmeshwar Das in favour of Central Bank is illegal.
Handover of possession of land.

The Bank opposed the Civil Suit by filing an Application under Order 7 Rule 11 of CPC seeking rejection of Plaint on the ground that jurisdiction of Civil Court under Section 34 of the SARFAESI Act is barred. The Civil Court allowed the Application and rejected the Plaint. The High Court, in Appeal, restored the suit before the Civil Court on the ground that the jurisdiction of Civil Court is not ousted. Being aggrieved the Central Bank filed Appeal before the Supreme Court.

The Supreme Court observed that the DRT, under Section 17(3) of the Act is only empowered to determine whether the measures taken by the Bank under Section 13 are in accordance with the provisions of the Act. Since the reliefs sought by the Plaintiff in the Civil Suit, as reproduced hereinabove, pertain to declaration and hand over of possession, therefore, a DRT would not have the jurisdiction to grant the reliefs sought by the Plaintiff and the appropriate forum would be the Civil Court for examination and grant of such reliefs-

“18….The SARFAESI Act has not been enacted for providing a mechanism for adjudicating upon the validity of documents or to determine questions of title finally. The DRT does not have the jurisdiction to grant a declaration with respect to the mortgage deed or the sale deed as sought by the Plaintiff. The jurisdiction to declare a sale deed or a mortgage deed being illegal is vested with the civil court under Section 9 of the Code of Civil Procedure. Therefore, the Civil Court would have the jurisdiction to finally adjudicate upon the first two reliefs.”

Insofar the third relief sought by the Plaintiff is concerned viz. handover of possession, the Supreme Court observed that the DRT would not be equipped to grant the aforesaid relief also as the SARFAESI Act, as per Section 17(3) only empowers the DRT to ‘restore’ possession’ to the borrower. Since the Plaintiff in the above case, was neither the borrower, nor having possession of the land earlier, therefore, the DRT would not be equipped to grant the relief of ‘handover of possession’ to the Plaintiff, which only the Civil Court can grant.

Which cases the DRT is not equipped to adjudicate

The Supreme Court in Prabha Jain (supra) gave the following two illustrations in which the DRT would not have jurisdiction to entertain the dispute-

“Illustration 1: A and B are sons of X. On X’s death, A claims that X made a will bequeathing a particular parcel of land (“Land 1”) exclusively to A. A mortgages Land 1 to a bank and the bank initiates proceedings under the SARFAESI Act. The other son i.e. B claims that father X had made a will bequeathing Land 1 exclusively to B. Hence, there are two conflicting wills propounded by each son. B files a suit praying for a declaration that he is the exclusive owner of the land on the basis of the will and other reliefs. The civil court will have jurisdiction to decide which of the two wills is valid. It is inconceivable that DRT would have the jurisdiction to decide which will is valid.

Illustration 2: X was married to Y (wife). They did not have any biological children. Hence, in 1985, the couple adopted Q. In 1990, Y died and left her entire estate to X by way of a will. X died in 1995 without making a will. The adopted child Q (claiming to be sole owner by intestate succession) mortgaged one of the lands in favour of the bank which initiated SARFAESI proceedings. However, X’s only brother Z made a claim that the “adoption” of Q was not as per law and that there being no adoption in law, Q was not entitled to the estate of X. X filed a suit inter alia praying for the following declarations:

The adoption of Q was void and ineffective.
Z being the only heir as per intestate succession, Z was exclusively entitled to the land.
The Mortgage by Q in favour of the bank was invalid as it was a mortgage by Q who had no title.
The answer to the aforesaid would depend on whether Q’s adoption was valid or not. If the adoption is valid, Q had title and the mortgage in favour of the bank would be valid. If the adoption was invalid, Z would be the owner & Q’s mortgage would be invalid.

The civil court will have jurisdiction to decide upon the validity of the adoption, not the DRT.”

Interpretation of Clauses which bar the Civil Court’s jurisdiction

The Supreme Court in Prabha Jain (supra) emphasized that the bar of jurisdiction of the Civil Court is not to be readily inferred, and a provision of statutory bar must be given strict interpretation. The Supreme Court relied upon a judgment rendered by a three-judge bench viz. Dwarka Prasad Agarwal (Dead) by LR’s & Anr. vs Ramesh Chander Agarwal & Ors.², wherein the Supreme Court held that the court should lean in favour of a construction which would uphold the retention of the Civil Court’s jurisdiction-

“22. The dispute between the parties was eminently a civil dispute and not a dispute under the provisions of the Companies Act. Section 9 of the Code of Civil Procedure confers jurisdiction upon the civil courts to determine all disputes of civil nature unless the same is barred under a statute either expressly or by necessary implication. Bar of jurisdiction of a civil court is not to be readily inferred. A provision seeking to bar jurisdiction of a civil court requires strict interpretation. The court, it is well settled, would normally lean in favour of construction, which would uphold retention of jurisdiction of the civil court. The burden of proof in this behalf shall be on the party who asserts that the civil court’s jurisdiction is ousted.”

Conclusion

Therefore, essentially, the Civil Court would have the jurisdiction to entertain the dispute despite the applicability of the provisions of SARFAESI Act if-

The case pertains to disputed title of the Secured Asset/Property.
The case pertains to fraudulent actions of the Secured Creditor³.

However, the Supreme Cour in Electrosteel Castings Ltd. vs Asset Reconstruction Co. Ltd. & Ors.⁴ clarified that mere allegations of fraud in the plaint will not overcome the bar under Section 34 of the Act. If there is something more than mere allegations of fraud, then Civil Court’s Jurisdiction will not be ousted⁵.

By Daksh Pandit