Defaulter Can't Initiate Criminal Proceedings Against Creditor/Auction Purchaser Against Auction Held Under SARFAESI Act, Must Go To DRT: Allahabad High Court

While quashing criminal proceedings against officers of M/s Himri Estate Private Limited and Indiabulls Housing Finance Ltd. initiated by Shipra Group, the Allahabad High Court held that defaulter cannot initiate criminal proceedings against creditor/auction purchaser against the auction conducted under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The Court held that grievance regarding auction, transfer of property in such cases must be raised before Debt Recovery Tribunals under the SARFAESI Act.

The bench comprising of Justice Ashwani Kumar Mishra and Justice Ashutosh Srivastava held

“The tendency of the defaulter to invoke criminal proceedings for resisting coercive action under the SARFAESI Act has to be curbed. The Parliamentary vision of vesting exclusive jurisdiction in specialized tribunal viz DRT, in respect of banking transactions relating to loan, debt etc. has to be respected. Criminal proceedings cannot be pressed into action at the instance of defaulter to scuttle proceedings under the SARFAESI Act on issues exclusively triable by DRT.”

The Court held that allegations relating to transfer of secured assets in favor of auction purchaser and the process of auction can only be dealt with as per procedure prescribed under the SARFAESI Act before the Debt Recovery Tribunal.

The Court held that vague allegations of encroachment, beyond the transferred secured asset, or alleged irregularity in conduct of auction etc. which have not been substantiated by the defaulter/ borrower and are sub-judice before the DRT cannot be raised by filing an FIR against the finance company/ creditor/ auction purchaser.

The Court relied on K. Virupaksha and Anr. vs. State of Karnataka and Anr. where the Supreme Court had held that the SARFAESI Act is a complete code in itself, where procedure to be followed by secured creditor and remedies for any aggrieved party, including the borrower have been laid down. The Court had held that for any discrepancies in auction process or valuation of property must be challenged before the Debt Recovery Tribunal. The Court held that the power to set aside auction lies only with the DRT after invocation of Section 13 of the SARFAESI Act by the secured creditor.

The Apex Court had held that where proceedings under SARFAESI Act have been finally adjudicated upon by the DRT and High Court, jurisdictional police cannot be allowed to investigate so as to review the orders passed by Competent Courts. While quashing criminal complaints, the Court held that “the banking system cannot be allowed to be held to ransom by such intimidation.”

Factual Background

Indiabulls Housing Finance Ltd. (IHFL) sanctioned 16 loan facilities of Rs.2801.00 Crores to "Shipra Group/Borrowers" comprising of Shipra Hotels Ltd., Shipra Estate Ltd. and Shipra Leasing Pvt. Ltd. for the purposes of construction and development of housing projects. Shares of various companies were pledged in favour of IHFL.

M/s Kadam Developers Pvt. Ltd. was granted permission to mortgage its land allotted by Yamuna Expressway Industrial Development Authority (YEIDA) under its sub-lease with IHFL.100% equity shares (demated) of M/s Kadam Developers were pledged to secure the loan. Shipra Group committed default of approximately Rs.1763.00 Crores. Due to no response from Shipra Group, IHFL sold the pledged equity shares to one M/s Finalstep Developers Pvt. Ltd. with M3M India Pvt. Ltd. as confirming party for R.900.00 Crores.

M/s. Kadam Developers conveyed the factum of the sale to YEIDA within 45 days. However, YEIDA lodged FIRs against IHFL and its officers for selling the shares of M/s. Kadam Developers as it caused it a loss of Rs. 200 crores.

Meanwhile, IHFL through proceedings under the SARFAESI Act auctioned the “Shipra Mall” to M/s Himri Estate Private Limited. Sale certificate was issued in favor of Himri Estate in May 2023.

Counsel for petitioners argued that once the proceedings under SARFAESI have been challenged by the borrower/ Shipra Group before DRT Lucknow, the same could not be challenged by filing an FIR against the officers of IHFL and Himri Estate. It was argued that filing of FIR was abuse of the process of law.

Proceedings Before the HC & SC

A division bench comprising of Justices Vivek Kumar Birla and Rajendra Kumar-IV had delivered two separate orders in the same case for quashing of FIRs under Sections 420 and 120B of IPC against the officers of Indiabulls Housing Finance Ltd. by Mohit Singh, Director of Shipra Estate. While Justice Birla ordered stay on the proceedings, Justice Kumar held that stay could not be granted without instructions to the Additional Government Advocate.

Thereafter, the case was referred to Justice Samit Gopal as a tie breaker. Taking note of the orders passed by the Apex Court in Gagan Banga v. Samit Mandal & another, [Contempt Petition (Civil) No. 774 of 2023 in Criminal Appeal No. 463 of 2022] and the decision of the bench presided over by then Chief Justice of Allahabad High Court in Neeraj Tyagi and another vs. State of U.P. and 3 others, Justice Gopal opined that this was a “fit case for grant of interim protection to the petitioners.”

Subsequently, the stay order was challenged before the Supreme Court, wherein the stay was vacated. The Supreme Court had criticized the High Court for granting blanket protection to the petitioners against the proceedings.

Once again when the case came up before the High Court, the main issue framed by the Court was whether an FIR can be lodged for challenging the proceedings initiated under SARFAESI Act where auction has concluded.

The Court observed that the borrower had instituted various proceedings in different forums to stall the auction proceedings but was unsuccessful. The Court held that an FIR at the behest of a defaulter when challenge to auction under the SARFAESI Act is already pending before the Debt Recovery Tribunal is not sustainable in law as it would open a “new avenue” for defaulters to challenge auction proceedings.

“Once that be so, we fail to understand as to how a first information report can be lodged in respect of various transactions undertaken by the finance company culminating in transfer of property in question to the auction purchaser. We are, therefore, of the view that impugned FIR could not have been lodged at the instance of the defaulter company which is already contesting this matter before DRT at Lucknow.”

Accordingly, the Court allowed the petitions and quashed the FIRs filed against the officers of Himri Estate and IHFL.

Case Title: Himri Estate Pvt. Ltd. and 4 Others vs. State of UP and 2 Others 2024 LiveLaw (AB) 253 [Criminal MISC. Writ Petition No. – 11838/2023]

Case citation: 2024 LiveLaw (AB) 253

Appearances: Gopal S. Chaturvedi and Siddharth Agarwal, Senior Advocates assisted by Dhruv Kapur, Debashish Chauhan, Varad Nath, Rajan Kohli, Divya Lamba, Maharshi Kaler and Chiranjivi Sharma for petitioners in Writ Petition No. 11838 of 2023; Anoop Trivedi, Senior Advocate assisted by Raghav Dwivedi for petitioner in Writ Petition No. 11837 of 2023 and Syed Imran Ibrahim, counsel for first informant and J.K. Upadhya and Sri Pankaj Kumar, AGA for State.

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