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Exception To DRT's Jurisdiction- Is Mardia Chemicals Still Relevant?

Prashant Tripathi
20 March 2022 6:19 AM GMT
Exception To DRTs Jurisdiction- Is Mardia Chemicals Still Relevant?
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Section 34 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) bars a Civil Court from entertaining any suit or proceeding in respect of any matter which a Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered by or under the SARFAESI Act. While testing the validity of the SARFAESI Act, the Hon'ble...

Section 34 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) bars a Civil Court from entertaining any suit or proceeding in respect of any matter which a Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered by or under the SARFAESI Act. While testing the validity of the SARFAESI Act, the Hon'ble Supreme Court had, in the case of Mardia Chemicals[1], carved out a limited exception to the Section 34 of the SARFAESI Act by observing that a party may, to a very limited extent, invoke the jurisdiction of the civil court, where for example, the action of the secured creditor is alleged to be fraudulent or their claim may be so absurd and untenable which may not require any probe, whatsoever or to say precisely to the extent the scope is permissible to bring an action in the civil court in the cases of English mortgages.

While dealing with the issue of fraud/forgery, the judgment in Mardia Chemicals has been considered by Hon'ble Supreme Court as well as various High Court across the country, however, it appears that competence of DRT to deal with the issues of fraud/forgery is still not clear as the courts across the country have taken divergent views on this issue. The present article attempts to clear the ambiguity created qua the competence of DRT to deal with the issue of fraud/forgery.

Scope Of Section 34:

Section 34 of the SARFAESI Act reads as under:

"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).

A reading of section 34 shows that the jurisdiction of the civil court is barred in respect of matters which a DRT or appellate Tribunal is empowered to determine in respect of any action taken "or to be taken in pursuance of any power conferred under this Act". In other words, the prohibition as laid down under Section 34 covers even matters which can be taken cognizance of by the DRT though no measure in that direction has so far been taken under sub-section (4) of Section 13. It is further to be noted that the bar of jurisdiction is in respect of a proceeding which matter may be taken to the Tribunal. Therefore, any matter in respect of which an action may be taken even later on, the civil court shall have no jurisdiction to entertain any proceeding thereof. Thus, the jurisdiction of civil court is barred in all such matters which may be taken cognizance of by the DRT. Section 34 also prohibits a Court or other authority from granting injunction in respect of any action taken or to be taken in pursuance of any order conferred under the SARFAESI Act or under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act).

Powers & Jurisdiction Of DRT- Provisions Under SARFAESI & RDB Act:

In terms of Section 17(1) of the SARFAESI Act, any person (including borrower) aggrieved by any of the measures referred to in Section 13(4) taken by the secured creditor or his authorized officer under chapter III (Enforcement of Security Interest) of the SARFAESI Act, may make an application to a DRT having jurisdiction in the matter within forty-five days from the date on which such measure had been taken. Section 17(3) of the SARFAESI Act, 2002 empowers DRT to examine facts and circumstances of the case and evidence produced by the parties and declare the recourse taken by a secured creditor as invalid and pass certain other directions as mentioned under this Section. Section 17(7) of the SARFAESI Act, 2002 mandates the DRT to dispose of the application filed under Section 17 of the SARFAESI Act, 2002 in accordance with the provisions of the RDB Act.

By virtue of Section 17(7) read with Section 37 of the SARFAESI Act, the DRT, while dealing with an application under Section 17 of the SARFAESI, can exercise the powers conferred upon it under Section 22 of the RDB Act which deals with the powers of DRTs and the Appellate Tribunal. This Section makes it clear that the DRT and the Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 rather they can regulate their own procedure while guided by the principles of natural justice. Section 22(2) further confers upon the DRTs and the Appellate Tribunal the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely: (a) summoning and enforcing the attendance of any person and examining him on oath;(b) requiring the discovery and production of documents;(c) receiving evidence on affidavits; (d) issuing commissions for the examination of witnesses or documents; (e) reviewing its decisions; (f) dismissing an application for default or deciding it ex parte; (g) setting aside any order of dismissal of any application for default or any order passed by it ex parte.

It is further relevant to note that Rule 18 of the Debts Recovery Tribunal (Procedure) Rules, 1993 specifically empowers a DRT to pass such orders as may be necessary or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of justice.

Jurisdiction Of DRT- Judicial Pronouncements:

The ambit of the DRT's jurisdiction has been discussed by the Hon'ble Supreme Court in the matter of Industrial Credit and Investment Corporation of India Limited v. Grapco Industries and others, (1999) 4 SCC 710, wherein it has been observed that the jurisdiction of DRT is much wider than that of a civil court. It has also been observed that the DRT can travel beyond the CPC and the only fetter that is put on its powers it to observe the principles of natural justice.

The scope of enquiry under Section 17 of the SARFAESI Act has been dealt with by the Full Bench of the Hon'ble High Court of Madras in the matter of Lakshmi Shankar Mills (P) Limited & others v. The Authorised Officer/Chief Manager, Indian Bank & others, MANU/TN/0676/2008. After analyzing various judicial precedents and object of the SARFAESI Act, the Full Bench held that all such grounds, which rendered the action of the bank/financial institution illegal, can be raised in the proceedings under Section 17 of the Securitisation Act before the Debt Recovery Tribunal. It is for the Debt Recovery Tribunal to decide in each case whether the action of the bank/financial institution was in accordance with the provisions of the said Act and legally sustainable.

Another relevant judgment in this regard is V. Thulasi v. Indian Overseas Bank, MANU/TN/1939/2011 passed by the Division Bench of Hon'ble High Court of Madras, wherein it was alleged that the defendants had misused the documents executed by the plaintiff and therefore, the security interest being a product of fraud shall be declared null and void and the bank shall be restrained from proceeding against the plaintiff or the plaint schedule property. The bank therein had filed an application under Order VII Rule 11(d) of the CPC for rejection of plaint on the ground that the jurisdiction of the civil court to entertain the suit was barred by Section 34 of the SARFAESI Act. The Single bench had held that in view of Section 34 of SARFAESI Act, no Civil Court shall have jurisdiction to entertain the suit. While upholding the judgment of the Single bench, the Division Bench had held that there is no force in the contention that the DRT is not vested with the power to inquire into the issues concerning the creation of security. It was also observed that the remedy available under Section 17 is not illusory. The right to move an application under Section 17 of the SARFAESI Act accrues to any person aggrieved by any of the measures taken under Section 13(4). The expression 'evidence produced by the parties' occurring in Section 17(3) would include evidence produced by the party, though he may be a person other than the borrower.

The observations made by the Hon'ble High Court of Punjab and Haryana in the matter of HDFC Bank Limited Vs. Gee Kay International & others, MANU/PH/1210/2012 have a significant bearing while trying to find out the answer of the question involved in the present article. In this case also, the plaintiff in the civil suit had pleaded forgery and fraud in order to make its case fall within the limited exception carved out by the Hon'ble Supreme Court in Mardia Chemicals case. The application under Order VII Rule 11 of CPC for rejection of plaint filed by HDFC Bank was dismissed by the trial court. While setting aside the order of the trial court, the Hon'ble High Court relied on Section 18 of the RDB Act and Section 34 of the SARFAESI Act. Pertinently, the matter reached to the Hon'ble Supreme Court by way of an SLP (C) No. 31343/2012 and after hearing the parties at length, the Hon'ble Supreme Court did not find any fault with the conclusion arrived at by the High Court and directed DRT to give proper and adequate opportunity to Gee Kay International to the prove the defence of fraud and forgery.

Next in the series comes the judgment of the Hon'ble Supreme Court in Jagdish Singh Vs. Heeralal and others, MANU/SC/1126/2013 wherein in order to frustrate the recovery actions initiated by the bank and defeat the rights of the auction purchaser, a suit was filed for declaration of title, decree of partition and decree of permanent injunction was sought against the bank. The preliminary objection on the maintainability of suit as raised by the bank was upheld by the trial court, however, the order of trial court was reversed by the Hon'ble High Court of Madhya Pradesh. Against the order of the High Court, the auction purchaser had approached the Hon'ble Supreme Court. After considering various judicial precedents including Mardia Chemicals case, the Hon'ble Supreme Court upheld the order of the trial court with observations that the expression 'any person' referred to in Section 17 would take in the Plaintiffs in the suit as well. Itt was further observed that irrespective of the question whether the civil suit is maintainable or not, under the SARFAESI Act itself, a remedy is provided to such persons so that they can invoke the provisions of Section 17 of the SARFAESI Act, in case the bank (secured creditor) adopts any measure including the sale of the secured assets, on which the Plaintiffs claim interest. The Hon'ble Supreme concluded that he civil court jurisdiction is completely barred, so far as the "measure" taken by a secured creditor under Sub-section (4) of Section 13 of the SARFAESI Act is concerned.

The aforesaid judgment has been followed by the Hon'ble Supreme Court in Sree Anandhakumar Mills Limited v. Indian OverseasBank and others. Another important judgment on this issue is Authorized Officer, State Bank of India v. Allwyn Alloys Private Limited & Ors. reported in (2018) 8 SCC 120 wherein the bank had approached the Hon'ble Apex Court on the ground that all issues concerning the mortgaged property are required to be decided only by DRT. After hearing the respective parties, the Hon'ble Supreme Court was pleased to accept the submissions made by the bank and held that the mandate of Section 13 and in particular Section 34 of the SARFAESI Act clearly bars the filing of a civil suit. The Hon'ble Court also observed that the approach of the Hon'ble High Court that DRT was not competent to deal with factual issues warranting production of evidence and a full-fledged trial was completely fallacious and untenable in law. Similar view can be found in the judgments of the Hon'ble Supreme Court in Canara Bank Vs. P. Selathal and others and Electrosteel Castings Limited v. UV Asset Reconstruction Company Limitedand others.

Going one step ahead, the Hon'ble High Court of Punjab & Haryana has, in the matter of State Bank of India v. Anish Kumar and others, MANU/PH/0657/2018, held that the question of title and partition of the property can be decided by the DRT. It has been observed that Section 17 of the SARFAESI Act does not in any manner restrict the jurisdiction of the DRT to decide the question of title or partition of the property. It has also been observed that the DRT is entitled to decide any dispute which may arise in the facts and circumstances of the case, if the proceedings under Section 13 of the Act has been initiated and the any person is aggrieved of the same.

However, contrary to the above view, the Hon'ble High Court of Delhi in the matter of Ritu Gupta & Another v. Usha Dhand and others, 2014 SCC OnLine Del 6506, has observed that when legality of the title deeds forming the basis of equitable mortgage are themselves questionable would require evidence to be led by the parties and therefore, such case falls within the limited exception carved out by the Mardia Chemicals case. Similar view has been taken by the Hon'ble High Court of Delhi in Tajunissa and another v. Vishal Sharma and others, 2022 SCC OnLine Del 18.

The most debatable judgment in this line is Bank ofBaroda v. Gopal Shriram Panda and others passed by the Division Bench of Hon'ble High Court of Bombay (Nagpur Bench) wherein it has been held that though the jurisdiction of DRT to decide all matters relating to section 13 and 17 of the SARFAESI Act is exclusive and where the title to the property, in respect of which a 'security interest', has been created in favour of the Bank or Financial Institution, stands in the name of the borrower and/or guarantor, and the borrower has availed the financial assistance, it would be only the DRT which would have exclusive jurisdiction to try such matters, to the total exclusion of the Civil Court and any pleas as raised by the borrowers or guarantors, vis-Ã -vis the security interest, will have to be determined by the DRT, however, the jurisdiction of the Civil Court to decide all matter of civil nature, excluding those to be tried by the DRT under section 13 and 17 of the SARFAESI Act, in relation to enforcement of security interest of a secured creditor, is not barred by Section 34 of the SARFAESI Act. It has also been held that when civil rights of persons other than the borrower(s) or guarantor (s) are involved, the civil court would have jurisdiction.

Author's View:

In the respectful view of the author, the limited exception carved out by the Hon'ble Supreme Court in Mardia Chemicals must be construed strictly. The author is also of the view that with the subsequent judgments of the Hon'ble Supreme Court, the limited exception stands diluted and is of no more relevance for the reason that DRTs are duly empowered to deal with the issues of frauds and/or forgery and there is nothing in the law which restricts the DRT from appreciating evidences before it for the purpose of deciding complex issues of frauds and forgery.

With all greatest respect, the author is of the view that the Division Bench of the Hon'ble Bombay High Court in Bank of Baroda (supra), to the extent it observes that Section 34 of the SARFAESI Act does not oust the jurisdiction of the Civil Court, does not lay down the correct law as the conclusions arrived at by the Hon'ble Division Bench appears contrary to the observations made by the Hon'ble Supreme Court in Jagdish Singh (supra), Anandhakumar Mills (supra) and more particularly Allwyn Alloys (supra). Another reason why this judgment, to the extent it observes that the jurisdiction of civil court in matters of fraud and forgery is not barred by Section 34 of the SARFAESI Act, appears not to be a good law is the observations of the Hon'ble Supreme Court in N.N.Global Mercantile Private Limited Vs. Indo Unique Flame Limited and others, LL 2021 SC 13 wherein it has been held that an Arbitral Tribunal constituted pursuant to the Private Contract between parties is empowered to deal with the issue of fraud, irrespective of the complexity of facts involved therein.

Thus, when an arbitral tribunal which is creation of private contract can deal with the issues of frauds, the DRT, which is a creation of a statute, must be held competent to deal with the issues of frauds, irrespective of the complexity of facts involved therein. In the considered opinion of the author, each and every issue having a connection or bearing with the legality or validity of the security interest must be dealt with by the DRT and jurisdiction of Civil Court in such matters is completely barred by virtue of Section 34 of the SARFAESI Act read with Section 18 of the RDB Act. It is also relevant to note that by virtue of Section 35, the provisions of the SARFAESI Act have an overriding effect over any other law which is inconsistent with the SARFAESI Act.

It is indeed correct that DRT is not a civil court but at the same time, the observations of the Hon'ble Supreme Court in Grapco Industries (supra) that jurisdiction of DRT is wider than that of civil court must be kept in mind. It is also worth to underpin the observations made by the Hon'ble Supreme Court in Allwyn Alloys (supra) wherein the Supreme Hon'ble Court has observed that the approach of the Hon'ble High Court that DRT was not competent to deal with factual issues warranting production of evidence and a full-fledged trial was completely fallacious and untenable in law.

In view of the subsequent judgments of the Hon'ble Supreme Court recognizing the competence of DRT and other private tribunal/authorities to deal with the issue of fraud/forgery, it is concluded that the limited exception carved out by the Hon'ble Supreme Court in Mardia Chemicals (supra) is no more relevant in the present era. It would be a fallacy to say that DRT, despite being a creation of Statute, is not competent to deal with complex issues of frauds/forgery and multiplicity of proceeding can be prevented by Civil courts by not entertaining suits involving issues having any connection or bearing with the secured asset in which security interest has been created in favour of the bank/financial institution (secured creditor).

The author is an Advocate at New Delhi. Views are personal.

[1] Mardia Chemicals Limited & others v. Union of India & others, MANU/SC/0323/2004: (2004) 4 SCC 311F

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