S.34 SARFAESI Act | General Bar On Civil Proceedings Not Applicable When Secured Creditor Accused Of Committing Fraud: Delhi High Court

Justice C. Hari Shankar, quoted the Supreme Court in Mardia Chemicals Ltd. v. UOI (2004), in the context of this invocation:

"To the statutory proscription engrafted in Section 34 of the SARFAESI Act, therefore, the Supreme Court has, in the aforeextracted passage from Mardia Chemicals, chiseled out an exception, in a case in which "for example, the action of the secured creditor is alleged to be fraudulent or his claim may be so absurd and untenable which may not require any probe whatsoever".

The Court was hearing a plea involving claims of collusion between the Bank and the Defendant to fraudulently execute a mortgage agreement on Plaintiff's property.

The counsel for the Bank opposed issuance of summons and prayed that since the Bank had invoked Section 13 (Enforcement of security interest) of the SARFAESI Act, the suit may be dismissed in limine in light of the bar on civil proceedings under Section 34.

Section 34 provides that 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 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.

However, noting that the Complaint in the plaint had alleged collusion against the Bank, the action of the Bank as a secured creditor in invoking Section 13 of the SARFAESI against the Defendant, did not bar the Plaintiff from taking recourse to civil proceedings.

SARFAESI's Section 34 Bar

The Court heavily relied on Mardia Chemicals to reject Defendant's opposition in the instant case. The Court cited the exception to the negative standing of the Supreme Court on the recourse to civil proceedings post invocation of Section 13 of the SARFAESI Act. The precedent clearly laid out the exception of an allegation of fraud against the claim of the secured creditor/bank for recourse to civil proceedings. Further, recourse to civil proceedings is not excepted solely by fraud. This was evidenced by the Supreme Court's wording "for example," indicating a non-exhaustive list. The quoting is reproduced below for reference:

"However, to a very limited extent jurisdiction of the civil court can also be invoked, where for example, the action of the secured creditor is alleged to be fraudulent or his 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."

This includes the category of cases where allegations of fraud are made against the secured creditor. As the Police Complaint alleged collusion on the part of the Bank, the same being characterized as "fraud" attracted the above exception. Justice Hari Shankar observed:

"Collusion, if alleged, therefore, partakes, in its essence, of the character of fraud. Particularly in the case of a Bank, which enjoys a fiduciary relationship with the public, an expansive interpretation to the expression "fraud" has to be accorded. Whether the allegation is right or wrong, substantial or merely chimerical, or merely a puff in the air, is not relevant while examining the applicability of para 51 of the report in Mardia Chemicals4 . Once the allegation exists, it exists, for better or for worse. Once fraud, on the part of the secured creditor, is alleged, recourse to ordinary civil remedies cannot be denied to the plaintiffs."

The Court rejected the objection of Defendant to oppose the summons and made it clear that orders in the suit and pending applications would be pronounced separately.

Case Name: Tajunissa & Anr. V. Mr. Vishal Sharma & Ors.

Citation: 2022 LiveLaw (Del) 78

Case Number: CS(OS) 262/2019 & I.A. 7168/2019

Judgment Date: 4th January, 2022

Coram: JUSTICE C. HARI SHANKAR

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