Supreme Court Stays Commercial Suit Proceedings Against Aditya Birla Finance Over SARFAESI Proceedings

The Supreme Court recently issued notice on a special leave petition filed by Aditya Birla Finance Ltd against a judgment of the Bombay High Court which held that a commercial suit won't be barred by Section 34 of the SARFAESI Act when there are allegations of fraud.The bench of Chief Justice of India Sanjiv Khanna and Sanjay Kumar also stayed the further proceedings before the Commercial Court. For context, Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) provides that a civil court will not have jurisdiction with respect to cases where a Debts Recovery Tribunal/Appellate Tribunal is empowered to adjudicate under the SARFAESI Act.A Special Leave Petition was filed before the Supreme Court by Aditya Birla Finance Ltd (present Petitioner, original Respondent) which submitted that the civil suit is not maintainable and is barred under Section 34 of SARFAESI Act, 2002.It was argued that once the bank extended a loan and the payment was not made, the SARFAESI proceedings are conducted to sell off the company's mortgage property. All suits are barred under Section 34 of the SARFAESI Act. Still, a commercial suit was filed by the Director/borrower, stating that the loan given by Aditya Birla and the mortgage of the property was fraud and collusive with other directors. Justice Bharat P. Deshpande of the High Court on October 15 held, “The question of fraud and, collusion and the relief claimed in the suit of declaration that the loan facility and the mortgage created in favour of defendant no.1 (bank) is a nullity, is certainly not coming within the jurisdiction of DRT or under the SARFAESI Act. Such declaration is only permissible under the Specific Relief Act.”The Court referred to Bank of Boroda, through its BranchManager vs. Gopal Shriram Panda and another (2021), where a division bench of Bombay High Court observed that the jurisdiction of a civil court with respect to enforcement of security interest of a secured creditor is not barred by Section 34 of the SARFAESI Act. It was observed that civil courts would have jurisdiction in cases which are incapable of being decided by the Debt Recovery Tribunal under Section 17 of the DRT Act read with the provisions of the SARFAESI Act."Applying the above proposition to the matter in hand one thing is clear that by rejecting a plaint when there are specific pleadings regarding fraud and collusion by giving specific instances, there by applying Section 34 of the SARFAESI Act, clearly amounting to miscarriage of justice," the high court observed.The petitioners also argued that the decision of the Bombay High Court is contrary to the decision of the Supreme Court in Punjab and Sind Bank v. Frontline Corporation Ltd.BackgroundBefore the high court the petitioner–a shareholder in the respondent company, had challenged the order of the First Appellate Court, which had upheld the Commercial Court's order rejecting the petitioner's plaint.The petitioner-plaintiff is the shareholder in respondent no.2 company–Libox Chem (India) Private Limited. Respondent-defendant nos. 3 and 4 are also shareholders in the respondent company.The petitioner alleged that the respondent nos. 3 and 4 took unwarranted loans from respondent no.1 bank–Aditya Birla Finance Limited. He alleged that the respondent nos. 3 and 4 mismanaged the affairs of the respondent company by recklessly borrowing the funds against the company's assetsAfter the bank moved a securitisation application under Section 14 of SARFAESI Act, the Additional Collector allowed the same directing it to take possession of the secured assets of the respondent company.Thereafter the petitioner approached the Debts Recovery Tribunal (DRT) under section 17(1) of the SARFAESI Act against the order of Additional Collector. However, the DRT disposed of the application on the ground that the petitioner did not have locus to file such proceedings since the he is merely a shareholder.In view of this, the petitioner approached the Commercial Court. The Commercial Court rejected the plaint on the ground that the suit is barred by Section 34 of SARFAESI Act. It observed that there was no specific pleading with respect to fraud and that the merely using words 'fraud, collusion and fraudulent' would not affect the bar under Section 34. Agreeing with the commercial court, the Appellate Court upheld its order. Against this the petitioner moved the high court order.The High Court noted that petitioner-plaintiff's plaint clearly shows that there are specific pleadings of fraud committed by the respondents. It noted that the plaint gives details of the collusion collusion between the secured creditors/bank and defendant nos.2 to 4 (company and two shareholders) in connection with execution of the document of loanIt further stated that there are specific allegations against respondent-defendants nos. 3 and 4, including that they conspired against plaintiff and took over the ...

Supreme Court Stays Commercial Suit Proceedings Against Aditya Birla Finance Over SARFAESI Proceedings

Gursimran Kaur Bakshi

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