DRT Cannot Adjudicate Civil Rights Claimed Vis-a-Vis Security Interest Which Are Outside Sec 13/17 SARFAESI : Bombay High Court

A division bench of the Bombay High Court(Nagpur Bench) has delivered an elaborate judgment on the issue of the jurisdiction of the civil courts vis-a-vis the Debts Recovery Tribunal with respect to the security interest under the SARFAESI Act.

A division bench comprising Justices SB Shurke and Avinash G Gharote was deciding the following question which was referred to in view of conflicting views expressed by different single bench decisions :

"Whether the jurisdiction of a Civil Court to decide all the matters of civil nature, excluding those to be tried by the Debts Recovery Tribunal under Section 17 of the Securitisation Act, in relation to enforcement of security interest of a secured creditor, is barred by Section 34 of the Securitisation Act ?"

Bar Under Section 34 SARFAESI Act not absolute;confined to matters under Section 13/17 SARFAESI Act

The division bench held that the bar under Section 34 of the SARFAESI Act, is not absolute, but is restricted to examination by the DRT of the actions of the secured creditor under Section 13 of the SARFAESI Act and the rights available under Section 17 of the SARFAESI Act.

DRT cannot embark on an adjudication of the civil rights claimed vis-a-vis the security interest, such as right of partition, specific performance, reliefs under Sections 31 and 34 of the Specific Relief Act, preemption, redemption, declaration in respect of a property.

"...can a person who claims a right of partition, specific performance, reliefs under Sections 31 and 34 of the Specific Relief Act, preemption, redemption, declaration in respect of a property which is a security interest, approach the DRT for claiming adjudication of his such claim ? And can the DRT grant him such relief ? In our considered opinion, the answer has to be in the negative for the reason that it is not permissible for the DRT to embark on an adjudication of the civil rights claimed vis-a-vis the security interest, in light of the clear, precise and specific language of Section 17 (1) and 18 of the DRT Act read with Sections 13, 17 and 34 of the SARFAESI Act".

Situations where civil courts may have jurisdiction over security interest

A security interest may at times also involve the common law rights of a citizen, who is not a party to its creation. The judgment illustrated certain examples where the civil court may have jurisdiction over the security interest, despite Section 34 of the SARFAESI Act.

(a) In Vineeta Sharma Vs. Rakesh Sharma and others , (2020) 9 SCC 1, the Apex Court, while considering the amendment to Section 6 of the Hindu Succession Act, 1956, whereby a daughter was recognised as a coparcener, has held that such recognition would give her right in the coparcenary property by her birth in the coparcenary and not from the date of death of her father or the amendment.

In such a matter if the male members of the family have already created a security interest in such coparcenary properties in favour of the Bank and for non payment of dues, if the same are being sought to be taken possession of and sold by auction, under Section 13 of the SARFAESI Act, can the Special Forum, DRT herein, which is undertaking this exercise, on being approached by the daughter who now due to the amendment to the Hindu Succession Act, 1956, has a share therein which stands recognised retrospectively by the Apex Court, decide and determine the rights of such daughter and grant a preliminary decree delineating her share and take further action to separate her share ? If it cannot, then could it be said that the Civil Court does not have the jurisdiction to do so, in view of the bar created under Section 34 of the SARFAESI Act ? But if it is so held then the daughter in spite of having a right in the property duly recognised by law, would be left remediless, as she cannot go to the Civil Court nor the Special Forum, the DRT, has any authority to determine the extent of her right and grant her the relief which she would be entitled to.

(b) Where the owner/borrower/guarantor has entered into an agreement of sale of the property and has accepted consideration resiles from the contract which is then put to enforcement by instituting a suit for specific performance, during the pendency of which if a security interest is created by the owner by offering the property as an equitable mortgage, and the property is then put to auction, can the Tribunal in such a case upon the plaintiff approaching it under Section 17, adjudicate the rights of the plaintiff vis-a-vis the security interest and release the property from further process under the SARFAESI Act ?

If the security interest in spite of the notice of the pendency of the suit is put to auction for recovery of the dues of the Bank, how would the principle of lis pendens in Section 52 of the Transfer of Property Act, affect the situation ? This is more so, as by filing a suit, the right of the plaintiff, has become crystallized. What would happen to the suit for specific performance, which in such a circumstance, on account of loss of the subject  property, would be rendered futile ?

(c) Another case in point would be where two or more persons hold title to the security interest and one of them has a power of attorney of the other, for taking steps to get the property mutated and do all activities necessary in that regard including to get the property partitioned, without any authority, mortgages the entire property with the Bank under the power of attorney which is accepted by the Bank, which on failure to repay is sought to be auctioned by invoking the powers under Section 13 of the SARFAESI Act. Can the Special Forum on the plea of the other co-owner enter into an adjudication of the issue about the nature and scope of the power of attorney and grant a declaration that the security interest was not legal to the extent of the share of the other co-owner ?

(d) Where on a prima facie demonstrable case, the person who has created the security interest, was not having any legal right in the property in respect of which security interest is created.

(e) Where the Bank is aware from documents on record that the borrower/mortgagor is not having any absolute right in the property or is having a limited right, contrary to which the security interest is created in the whole of the property vis-a-vis the borrower/mortgagor who is having only defined or undefined undivided share/interest in the property and the entire property is mortgaged.

(f) Where right of inheritance is claimed in the property, in respect of which a security interest is created.

(g) Since the claim of the Bank or Financial Institution, could only be for recovery of the debts due, in a suit for specific performance in respect of the security interest, the consideration, agreed could always be directed to be transferred to the Bank or the Financial Institution, as it would be the obligation of the Seller, under Section 55 of the Transfer of Property Act, to transfer a clear and marketable title, free of encumbrances and it cannot be said that the suit, since it involved the security interest, would be hit by the bar under Section 34, as the DRT cannot decide the claim for specific performance, which is within the domain of the Civil Court.

(h) In a suit for setting aside an alienation and partition of joint family properties, the plea of absence of legal necessity, in an alienation by a Karta of Hindu Joint Family, has consistently, if proved, been upheld by the Courts to upset the alienation. If such a suit involves the security interest, can it be said that it would be affected by the bar under Section 34 of the SARFAESI Act or that the remedy would lie under Section 17 of the SARFAESI Act, when the DRT has no power to adjudicate upon the issue and pass an appropriate decree.

(i) Could the suits in which pleas under Sections 31 and 34 of the Specific Relief Act are involved, in respect of the property, which is the subject matter, which is also a security interest, be considered to be triable by the DRT under Section 17 of the SARFAESI Act ?

(j) In a case where the declaration of an account as a non- performing asset (NPA), is contrary to the guidelines as framed by the RBI, could the DRT grant a declaration to that effect and consequently set aside all subsequent actions, if it finds that the declaration as NPA was contrary to the guidelines ? or a civil suit would lie ?

(k) Rights as available under the Transfer of Property Act, of foreclosure of accounts under Section 67; claim for redemption of mortgage under Section 60.

(l) Whether a security interest was validly created and when the applicability of the measures, itself is in doubt, can the DRT  determine this ?

These situations are indicative and point towards existence of Civil Court's jurisdiction, even in cases, where a security interest has been created.

There are other matters, where it has already been recognised that the Special Forum/DRT would not have jurisdiction, which are as under :

(a) A plea by the guarantor of discharge under Sections 133 and 135 of the Contract Act. [para 53 in Mardia Chemicals decision.

(b) A plea of fraud, if such plea is covered by Mardia Chemicals (supra) as clarified by A. Ayyasamy Vs. A. Paramasivam and others (2016) 10 SCC 386.

Conclusions

The Court summarized its conclusions as follows :

(A) Jurisdiction of the Debts Recovery Tribunal, to decide all matters relating to Sections 13 and 17 of the SARFAESI Act, is exclusive.

(B) In all cases, where the title to the property, in respect of which a 'security interest', has been created in favour of the Bank or Financial Institution, stands in the name of the borrower and/or guarantor, and the borrower has availed the financial assistance, it would be only the DRT which would have exclusive jurisdiction to try such matters, to the total exclusion of the Civil Court. Any pleas as raised by the borrowers or guarantors, vis-a-vis the security interest, will have to be determined by the DRT.

(C) The jurisdiction of the Civil Court to decide all the matters of civil nature, excluding those to be tried by the Debts Recovery Tribunal under Sections 13 and 17 of the SARFAESI Act, in relation to enforcement of security interest of a secured creditor, is not barred by Section 34 of the SARFAESI Act.

(D) Where civil rights of persons other than the borrower(s) or guarantor (s) are involved, the Civil Court would have jurisdiction, that too, when it is prima facie apparent from the face of record that the relief claimed, is incapable of being decided by the DRT, under Section 17 of the DRT Act, 1993 read with Sections 13 and 17 of the CRA 29 of 2011.odt SARFAESI Act.

(E) Even in cases where the enforcement of a security interest involves issues as indicated in Mardia Chemicals (supra) of fraud as established within the parameters laid down in A. Ayyasamy (supra); a claim of discharge by a guarantor under Sections 133 and 135 of the Contract Act [Mardia Chemicals (supra)]; a claim of discharge by a guarantor under Sections 139, 142 and 143 of the Contract Act; Marshaling under Section 56 of the Transfer of property Act [J.P. Builders (supra)]; the Civil Court shall have jurisdiction.

(F) Examples as indicated above, are illustrative of the Civil Court's jurisdiction.