23 Jun 2023 4:55 AM GMT
The Bombay High Court recently held that once a secured creditor issues demand notice under section 13(2) of the SARFAESI Act, 2002, the civil court’s jurisdiction is barred, and any challenge to the notice comes under the domain of the Debts Recovery Tribunal (DRT).Justice MS Jawalkar rejected a borrower’s civil suit alleging that the bank violated Guidelines on Fair Practices Code...
The Bombay High Court recently held that once a secured creditor issues demand notice under section 13(2) of the SARFAESI Act, 2002, the civil court’s jurisdiction is barred, and any challenge to the notice comes under the domain of the Debts Recovery Tribunal (DRT).
Justice MS Jawalkar rejected a borrower’s civil suit alleging that the bank violated Guidelines on Fair Practices Code for Lenders and Fair Lending Practices Code while classifying the loan account as a non-performing asset (NPA) observing that the borrower can raise these grounds in defence in the bank’s recovery suit before the DRT.
"Issuance of notice is the exercise of power conferred upon the defendant/Bank under section 13(2) of the SARFAESI Act and 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 are definitely comes within the jurisdiction of DRT and not the Civil Court”, the court held.
The court set aside trial court’s order refusing to reject two civil suits by a borrower against bank alleging that the bank acted illegally by not deciding proposal for restructuring of loan accounts as well as violating specific RBI circulars.
M/s Punya Coal Road Lines (borrower) availed various credit facilities from Union Bank of India since 2010 which were renewed and enhanced from time to time to the extent of Rs. 40 Crores by 2015. The borrower mortgaged immovable properties to secure the loan. It committed default and the loan accounts were declared as NPA in 2017. An amount of Rs.20,36,06,163.24 was due as on November 30, 2017.
The bank initiated the recovery of its dues under the Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002. It issued 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 physical position of the mortgaged properties. The bank also filed recovery suit before the DRT, Nagpur for recovery of Rs.19,67,50,000/-.
Meanwhile, the borrower filed two suits in the Civil Court seeking damages from the bank alleging that it acted illegally by classifying the loan account as NPA as well as not sanctioning the proposal for restructuring of loan account. It further alleged that the bank committed numerous illegalities in its dealings and violated the guidelines on Fair Practices Code for lenders and also contravened the specific Fair Lending Practices Code.
The trial court dismissed the bank’s applications seeking rejection of the borrower’s suits. Hence, the bank filed the present revision applications before the High Court.
The bank submitted that the Civil Court has no jurisdiction to entertain the suit once the notice under section 13(2) of the SARFAESI Act is issued and the loan is classified as NPA. It argued that once the notice classifying the loan account as NPA is made, action under the SARFAESI Act must be considered as initiated and the Civil Court’s jurisdiction is ousted as per section 34 of the Act. The bank further argued that there is no allegation in the entire plaint that the it played fraud on the borrower.
The Apex Court in Mardia Chemicals Ltd v. Union of India held that section 34 of the SARFAESI Act bars the jurisdiction of civil court in matters which the DRT is empowered to determine. However, if there is a fraud allegation against the secured creditor, the civil court has a limited jurisdiction to bring an action against the creditor, the Apex Court has held.
In the civil suits, the borrower sought a declaration that the bank acted illegally by not deciding the borrower’s proposals for restructuring the loan, permitting holding on operation, and release of mortgage properties and classifying the loan account as NPA pending the proposals, violating RBI circulars. It also sought direction to the bank to remove the loan account from NPA classification and a permanent injunction restraining the bank from acting on the NPA classification.
The court noted that the word ‘fraud’ is not used anywhere in the plaint. The court said that the borrower can raise all these prayers in the application file by the bank before the DRT. As soon as the notice under section 13(2) of SARFAESI Act is issued, any challenge to the notice comes within the domain of DRT, the court held. Thus, the reliefs claimed in the civil suit filed by the borrower come within DRT’s jurisdiction and not the civil court, the court added.
“the Plaintiffs (borrower) are having remedy and they can raise these grounds in defence in the Application filed by the Bank before the DRT. If there is any claim of defying any guidelines of RBI or any other Rules, Circulars, it is not the case that the Plaintiffs were not having any remedy, they may raise this ground in defence”, the court held.
The court rejected the suits observing that the trial court did not consider the effect of notice under section 13(2) classifying the loan account as NPA and also whether there was any pleading of fraud in the whole plaint.
At the borrower’s request, the court granted a 6 week stay on this judgment so that the borrower can file an appeal, considering oncoming vacations in the Supreme Court.
Also Read: S.34 SARFAESI Act | General Bar On Civil Proceedings Not Applicable When Secured Creditor Accused Of Committing Fraud: Delhi High Court
Case no. – Civil Revision Application Nos. 04 and 05 of 2021
Case Title – Regional Manager, Union Bank of India and Anr. v. M/s Punya Coal Road Lines and Ors.
Click Here To Read/Download Judgment