Defaulter Can't Initiate Criminal Proceedings Against Creditor/Auction Purchaser Against Auction Held Under SARFAESI Act, Must Go To DRT: Allahabad High Court

While quashing criminal proceedings against officers of M/s Himri Estate Private Limited and Indiabulls Housing Finance Ltd. initiated by Shipra Group, the Allahabad High Court held that defaulter cannot initiate criminal proceedings against creditor/auction purchaser against the auction conducted under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Court held that grievance regarding auction, transfer of property in such cases must be raised before Debt Recovery Tribunals under the SARFAESI Act.The bench comprising of Justice Ashwani Kumar Mishra and Justice Ashutosh Srivastava held “The tendency of the defaulter to invoke criminal proceedings for resisting coercive action under the SARFAESI Act has to be curbed. The Parliamentary vision of vesting exclusive jurisdiction in specialized tribunal viz DRT, in respect of banking transactions relating to loan, debt etc. has to be respected. Criminal proceedings cannot be pressed into action at the instance of defaulter to scuttle proceedings under the SARFAESI Act on issues exclusively triable by DRT.”The Court held that allegations relating to transfer of secured assets in favor of auction purchaser and the process of auction can only be dealt with as per procedure prescribed under the SARFAESI Act before the Debt Recovery Tribunal. The Court held that vague allegations of encroachment, beyond the transferred secured asset, or alleged irregularity in conduct of auction etc. which have not been substantiated by the defaulter/ borrower and are sub-judice before the DRT cannot be raised by filing an FIR against the finance company/ creditor/ auction purchaser. The Court relied on K. Virupaksha and Anr. vs. State of Karnataka and Anr. where the Supreme Court had held that the SARFAESI Act is a complete code in itself, where procedure to be followed by secured creditor and remedies for any aggrieved party, including the borrower have been laid down. The Court had held that for any discrepancies in auction process or valuation of property must be challenged before the Debt Recovery Tribunal. The Court held that the power to set aside auction lies only with the DRT after invocation of Section 13 of the SARFAESI Act by the secured creditor. The Apex Court had held that where proceedings under SARFAESI Act have been finally adjudicated upon by the DRT and High Court, jurisdictional police cannot be allowed to investigate so as to review the orders passed by Competent Courts. While quashing criminal complaints, the Court held that “the banking system cannot be allowed to be held to ransom by such intimidation.”Factual BackgroundIndiabulls Housing Finance Ltd. (IHFL) sanctioned 16 loan facilities of Rs.2801.00 Crores to "Shipra Group/Borrowers" comprising of Shipra Hotels Ltd., Shipra Estate Ltd. and Shipra Leasing Pvt. Ltd. for the purposes of construction and development of housing projects. Shares of various companies were pledged in favour of IHFL.M/s Kadam Developers Pvt. Ltd. was granted permission to mortgage its land allotted by Yamuna Expressway Industrial Development Authority (YEIDA) under its sub-lease with IHFL.100% equity shares (demated) of M/s Kadam Developers were pledged to secure the loan. Shipra Group committed default of approximately Rs.1763.00 Crores. Due to no response from Shipra Group, IHFL sold the pledged equity shares to one M/s Finalstep Developers Pvt. Ltd. with M3M India Pvt. Ltd. as confirming party for R.900.00 Crores. M/s. Kadam Developers conveyed the factum of the sale to YEIDA within 45 days. However, YEIDA lodged FIRs against IHFL and its officers for selling the shares of M/s. Kadam Developers as it caused it a loss of Rs. 200 crores. Meanwhile, IHFL through proceedings under the SARFAESI Act auctioned the “Shipra Mall” to M/s Himri Estate Private Limited. Sale certificate was issued in favor of Himri Estate in May 2023. Counsel for petitioners argued that once the proceedings under SARFAESI have been challenged by the borrower/ Shipra Group before DRT Lucknow, the same could not be challenged by filing an FIR against the officers of IHFL and Himri Estate. It was argued that filing of FIR was abuse of the process of law. Proceedings Before the HC & SCA division bench comprising of Justices Vivek Kumar Birla and Rajendra Kumar-IV had delivered two separate orders in the same case for quashing of FIRs under Sections 420 and 120B of IPC against the officers of Indiabulls Housing Finance Ltd. by Mohit Singh, Director of Shipra Estate. While Justice Birla ordered stay on the proceedings, Justice Kumar held that stay could not be granted without instructions to the Additional Government Advocate. Thereafter, the case was referred to Justice Samit Gopal as a tie breaker. Taking note of the orders passed by the Apex Court in Gagan Banga v. Samit Mandal & another, [Contempt Petition (Civil) No. 774 of 2023 in Criminal Appeal No. 463 of 2022] and the decision of the ...

Defaulter Can't Initiate Criminal Proceedings Against Creditor/Auction Purchaser Against Auction Held Under SARFAESI Act, Must Go To DRT: Allahabad High Court

Upasna Agrawal

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