S.17 SARFAESI Act | Recovery Action May Have Disastrous Consequences For Borrower, DRT Must Pass Interim Order Upon Application Of Mind: Kerala HC

The Kerala High Court recently held that interim orders passed by the Debts Recovery Tribunal under 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 cannot be issued mechanically and without application of mind. Doing so would amount to failure on the part of the Tribunal in proper and judicious exercise of the jurisdiction vested in it, the Court observed.

A single bench of Justice Gopinath P observed,

“when an application is brought before the Tribunal, under Section 17 of the Act, the Tribunal must be alive to the fact that the Bank/Financial Institution has initiated the proceedings without any adjudication and that the powers conferred under the Act are drastic and can have disastrous consequences for the borrower. This is all the more reason for the Tribunal to apply its mind with reference to the contentions taken before it (even at the interim stage) before deciding to grant or reject a prayer for interim relief.”

It added, "The provisions of the RDB Act (Recovery of Debts and Bankruptcy Act, 1993) read with provisions of the Tribunals Reforms Act, 2021 and the Tribunal (Conditions of Service) Rules, 2021 make it clear that it must be manned by a person who “is, or has been, a District Judge”. The orders issued by the Tribunal must therefore demonstrate reasonableness of its decision."

The Court was considering a batch of applications filed against various interim orders issued by the Debt Recovery Tribunal in Securitisation Applications filed under Section 17 of the SARFAESI Act to ascertain whether the Tribunal had exercised its jurisdiction in a proper and judicious manner.

Sr. Adv. K.K Chandran Pillai and Adv P.Binod, Adv. C.S Ullas and Adv. S.S Aravind appeared the Petitioners and Adv. P.C Sasidharan, Adv S.Easwaran and Adv. Sunil Shankar appeared for the respondent Banks/ Financial Institutions.

The Petitioners argued that granting of interim relief by the Tribunal must be guided by the principles of i) strong prima facie case; (ii) balance of convenience and (iii) irreparable injury as the proceedings under Section 17 of the Act are to be treated as original proceedings. The jurisdiction of the Tribunal in granting interim relief is similar to that of Civil Courts under the Code of Civil Procedure, it was argued. The petitioners contended that the Tribunal failed to consider applications on merits and that the orders were passed mechanically.

The petitioners also argued that the the alternative remedy of appeal under Section 18 of the Act before Debts Recovery Appellate Tribunal would require depositing 50% of the amount claimed by the bank for maintaining the appeal. In such circumstances, this cannot be considered an efficacious alternative remedy and hence petitioner is entitled to approach the High Court under Article 227 of the Constitution, the petitioner argued.

On the other hand, the Respondents argued that when an alternative remedy under Section 18 of the SARFAESI Act is available to the Petitioner, the petitioner cannot approach the Court under Article 226/227 of the Constitution. There are no exceptional circumstances that warrant the interference of the High Court and hence the petitions are not maintainable, the Respondents argued.

On Maintainability

The Court held that in cases where the Tribunal has failed to exercise its jurisdiction properly, requiring the petitioner to appeal against such order under Section 18 of the SARFAESI Act which mandates depositing 50% of the claimed amount for maintaining the appeal, would be a ‘negation of justice’

Holding that the petitions were maintainable under Article 227 of the Constitution, the Court observed:

“The orders impugned in these petitions are orders of Debts Recovery Tribunal functioning within the territorial limits of this Court. While the power under Article 227 of the Constitution of India should never be exercised in a manner that would result in the petition being an appeal in disguise, this Court would be failing in its duty if it were to hold that it would not even examine the question as to whether Tribunal had failed to exercise a jurisdiction vested in it and such failure has occasioned the failure of justice. In the facts of these cases, and considering the nature of the orders issued by the Tribunal, I am convinced that there is an apparent failure by the Tribunal to exercise a jurisdiction vested in it in a proper manner occasioning the failure of justice”

On Whether The Tribunal Exercised Its Jurisdiction In A Proper Manner

The Court observed that while passing an interim order under Section 17 the Tribunal must prima facie appreciate the contentions of the parties on merit and apply the well settled principles of i) strong prima facie case; (ii) balance of convenience; and (iii) irreparable injury. The Court also observed that even though a detailed order on the merit of each contention may not be required, the Tribunal must indicate that “it was alive to contentions raised in the Securitisation Application”.

“Considering the drastic nature of the powers conferred on the banks/financial institutions under the provisions of the SARFAESI Act, this Court must expect that the Tribunal will apply its mind to the contentions taken in the Securitisation Application and a decision on whether or not an interim stay should be granted will be taken on well-settled principles governing the grant of interim relief.” The Court observed.

In the matter at hand, the Court observed that the Tribunal failed to exercise its jurisdiction in a proper manner by not entering into the merits of the matters at all. The Court noted that the impugned orders of the Tribunal were without application of mind and were in the ‘cut, copy, paste’ category. ‘This is not palatable to our judicial ethos’ the Court concluded.

Case Title: Jimmy Thomas V. Indian Bank

Citation: 2023 LiveLaw (Ker) 241

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