Rejecting Plaint Citing SARFAESI Act When Pleadings Claiming Fraud Are Under Specific Relief Act, Amounts To Miscarriage Of Justice: Bombay HC

For context, Section 34 of 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 single judge bench of Justice Bharat P. Deshpande in its order said, “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. 

Before 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 assets

After 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 loan

It further stated that there are specific allegations against respondent-defendants nos. 3 and 4, including that they conspired against plaintiff and took over the complete control and management of respondent no.2-company. It was also pleaded that defendant nos. 3 and 4 made efforts to shut down the company by taking unwanted loan for their personal benefits and incorporated a new company to siphon funds and divert customers of respondent no.2-company to the new company.

The Court thus remarked, “A meaningful reading of the plaint would clearly go to show that there are specific and sufficient averments with regard to fraud played by bank along with defendant nos. 3 and 4 against the petitioner/plaintiff and the purpose of it. It is difficult to accept such finding of the Courts below about absence of pleadings.Plaint does not contain mere words such as fraud/fraudulent etc but it specifically discloses the instances by which plaintiff is trying to demonstrate as to how such fraud and collusion exists.”

The Court thus observed that the suit was filed by the petitioner under the Specific Relief Act. It stated that the plaint clearly discloses that reliefs claimed were not covered under the SARFAESI Act.

It further observed that the pleadings of declaring loan facility agreement and consequently creating of mortgage as a fraud is not barred by Section 34 SARFAESI Act.

It stated that the Commercial Court's order rejecting the plaint prevented the petitioner from having any remedy against the actions of the bank.

The High Court thus set-aside the orders of the Commercial Court and the Appellate Court. It thereafter restored the plaint in the commercial suit.

Case title: Mr. Shashikant Gangar vs. Aditya Birla Finance Limited

(Writ Petition No.1230 Of 2024-F With Civil Application No. 1231 Of 2024-F)