Whether a Civil Suit is Barred When the Statutory Remedy Under the SARFAESI Act is Available?

Introduction

Commonly in civil disputes, aggrieved parties approach the court with the prayer of getting some relief which could either compensate for the losses suffered by them due to fault on part of the adverse party or secure a position which can prevent any future losses expected to be incurred due to the default or conduct of adverse party. But the major point that the courts consider while adjudicating cases is what are relevant remedies available under the law and prayed for by the parties. Unless the law provides a court with the power to grant a specific kind of a relief, it cannot grant it, and the only exception remains is the power given to the higher courts in India to render justice by granting a wide range relief.

Jurisdiction refers to the extent of authority of a court to take cognizance in a matter of dispute and grant appropriate reliefs. This extent of authority is established by or under law, and any decision or judgment outside the permissible limits will render such decision to be void.

Earlier, when the civil courts were established in India, they used to deal with all categories of private disputes in general, but as the trade and commerce flourished, the number of such disputes also started increasing, burdening the workloads of courts. With economy expanding its horizon in the country, diverse sectors and business entered markets, looking for credit facilities from banking and financial institutions. To secure the interests of these lenders, it was felt necessary that specialised tribunals were established to devote their time particularly to the disputes of defaults by borrowers in repaying the debts or complying with terms of contract of lending. Although legislations like Recovery of Debt Due to Banks and Financial Institutions Act, 1993 were enacted to establish Debts Recovery Tribunal specifically cases between borrower and financial institutions, it was later felt necessary to provide for a mechanism where the involvement of courts is minimised, therefore Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted considering the issues faced by secured creditors and tried to ensure that delays in court proceedings do not adversely affect the value of their security interests.

Although, Section 34 of SARFAESI Act bars the jurisdiction of civil courts in cases involving matters covered under the Act and dealt by Debts Recovery Tribunal (DRT) or Appellate Tribunal (Debts Recovery Appellate Tribunal), we may still find cases in which the borrowers have invoked the jurisdiction of civil courts to delay or interfere with the measures taken by the lenders under SARFAESI Act. Therefore, the issue that requires consideration and will be dealt with in this Article is whether a civil suit is barred when a statutory remedy under the SARFAESI Act is available?

Understanding the SARFAESI Act

The idea behind enacting SARFAESI Act was to streamline the recovery process for secured creditors like banks and financial institutions which could ensure a quicker  recovery of bad debts from non-performing assets.^[1] The Act allows to take control of the management of business or sale of property in cases of default in discharging of liabilities by debtors without intervention of courts which can be termed as wide powers conferred as a right to them.

The provisions of SARFAESI Act can be invoked by secured creditors in cases where borrowers have failed to pay any of its due within the stipulated time under the security agreement to the secured creditor and such defaulting borrowers have been classified as non-performing assets in the manner prescribed.

Legal Framework Governing Civil Suits and Statutory Remedies

Statutory remedies:

Remedies available to a secured creditor under the Section 13(4) for enforcement of its security interest are the following:

1. to realise the secured assets, take its possession and of transfer through lease, assignment or sale of such property;
2. for realising the secured assets, take over the management of business of borrower including right of transfer by way of lease, assignment or sale;
3. to appoint a manager to administer the properties or security interest taken in the possession of creditor;
4. require any person by a written notice any person who has taken possession of a secured assets or who has some money due to the borrower, to pay a sufficient amount to the secured creditor.

The secured creditors can realise the secured assets by selling those properties by way of auction. Under subsection 10 of the Section 13, a secured creditor who could not satisfy the complete amount owed by the borrower by way of sale of its assets using the mechanism provided in the may apply to the DRT in order to recover the balance amount from the borrower.

Moreover, the secured creditor is also entitled under sub-section 11 to directly proceed against any of the guarantors of the borrower and sell the pledged assets without taking recourse to any of the remedies mentioned earlier herein.

Section 14 of SARFAESI also provides for the secured creditors with an option to take the help from Chief Metropolitan Magistrate or District Magistrate of an area where the secured asset is situate to take possession of the secured assets and help it sell  through the legal process prescribed after being satisfied on the necessary conditions required for  possession and sale of a property. The Chief Metropolitan Magistrate or District  Magistrate may also take custody of the documents of the property if requested by the secured creditors on this behalf.

Under Section 9 and 10 of SARFAESI Act, the secured creditors may even authorise any registered and permitted asset reconstruction company to act as its agent to recover dues from borrowers or to help it in maintaining the interest value of the non-performing assets by taking over the management of borrows business or properties or by way of its sale or taking recourse to other relevant  measures provided for under section 9 of the Act.

Procedure to enforce security interests

There is a set procedure stipulated under the SARFAESI Act which aims to ensure that the borrower is provided with a minimum period to repay its dues before any other measure provided under the Act and mentioned earlier herein is taken recourse to against its business or property. Provisions of the Act require secured creditors to give a written notice to the borrower who has failed to pay any dues or any of its instalments and has been classified as non-performing assets, to repay the remaining balance of dues within a period of 60 days from the date of the notice.

After a notice referred to above has been served in accordance with the provisions of the Act, the non-performing asset is also provided with an option to make a representation or raise objections against the warned claims of secured creditor, which shall be responded by the secured creditor within 15 days from the date of such representation or notice, if they are not accepted by the secured creditor.

The manner provided under the SARFAESI Act to recover the amount unpaid by non-performing assets is substantially different from the procedure followed in civil suits to recover dues to creditors other than banks and financial institutions. Generally, in civil suits the aggrieved party approaches the courts first by filing a plaint against the defaulting borrower and it is the court which adjudicates upon the claims and rights of the parties. Whereas, SARFAESI Act prescribes for a mechanism where the interference of the courts or tribunal comes later, and remedies provided can directly be enforced by the secured creditors or the secured creditor may take recourse to multiple recovery mechanisms discussed earlier by requesting and taking  assistance from the Chief Metropolitan Magistrate or District Magistrate as the case may be, under Section 14 of the Act

 General aspects which must be looked into before instituting a suit in a civil court are:

1. The dispute is of civil nature; and
2. The cognizance of such dispute is not expressly or by necessary implication barred by any law.

Unless the answer to these questions or aspects is in the positive, no civil court will take cognizance or proceed with a suit or case filed before it. Section 34 of  SARFAESI Act expressly bars the jurisdiction of civil courts to deal with  matters covered under the Act or  the Debts Recovery Tribunal or Appellate Tribunal are empowered to deal with.

Judicial Interpretation and Key Cases

Bar on Civil Suits under SARFAESI Act and Landmark Judgment on the issue:

Section 34 of the Act states that “no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered under the Act to deal with and no injunction shall be granted by any court….”

This text of this  Section makes it clear in no doubtful terms that jurisdiction of civil courts shall be prohibited to deal with or take cognizance of matters dealt under this Act by the DRT or Appellate Tribunal. In Robust Hotels (P) Ltd. v. EIH Ltd.^[2] the Hon’ble Supreme Court explained the elements of Section 34 by stating that the bar of jurisdiction of civil court arises only when:

• the suit or proceeding is one in respect of any matter in which Debts Recovery Tribunal or Appellate Tribunal is empowered under said Act, or
• in respect of any action taken or to be taken in pursuance of power conferred by or under SARFAESI Act, 2002 or under Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

The reasoning of the courts are backed by joint reading of Section 9 of CPC and Section 34 of SARFAESI Act, while the former states that civil courts shall be competent to deal with any dispute of civil nature unless their jurisdiction is expressly or impliedly barred under some law, the latter expressly bars the jurisdiction of the civil court in matters covered under it and dealt with by DRT.

Exceptions to the Bar on Civil Suits:

Although, the jurisdiction of civil courts is expressly barred under SARFAESI Act on particulars matters, the Supreme Court has upheld the jurisdiction of civil courts in such matters confined  to a limited extent in the case of Mardia Chemicals Ltd. v. Union of India^[3]. In paragraph 50 of the mentioned case,  the Hon’ble Supreme Court observed that the jurisdiction of civil courts is barred not only when matters are actually  taken up by DRT or Appellate Tribunal for adjudication, but also when they are empowered to take matters before it or may take cognizance of such matters in future. The court further noted in Paragraph 51 of the same case that the jurisdiction of a civil court can be invoked in limited cases where the action of the secured creditor is alleged to be fraudulent or its claims are very absurd and untenable which does  not require any probe whatsoever. The Hon’ble Supreme Court reiterated this exception in the case of  Punjab and Sind Bank v. Frontline Corporation Ltd.^[4], where it stated that the exception is relatable to the scope of exceptions under the English Mortgages.

Conclusion

The enactment of SARFAESI Act can be considered as a necessary step in relation to providing a strong and robust mechanism for secured creditors to recover the amount unpaid or realise secured assets  without or with least interference of judicial bodies. Quick recovery ensures that the non-performing assets are realised at an appropriate value and ensure continuity of revenue generating capacity of economic units. The stringent provisions or mechanism provided under SARFAESI Act were also challenged on the ground of being ultra vires the Constitution as arbitrary and unreasonable, but the Hon’ble Supreme Court upheld its constitutionality on the ground that the purpose of the legislation validated for such stringent provisions^[5]  and also cited similar legislations already in existence. This decision can be affirmed on the ground that the Act provides for the provision of appeal before DRT and  Appellate Tribunal under Section 17 and 18 against the actions or measures taken by secured creditors against the assets of debtors.

The Hon’ble Supreme Court while interpreting the provisions of SARFAESI Act has categorically stated that civil courts are barred from dealing with cases which are taken up or may be taken up at an appropriate stage by DRT or Appellate Tribunals, except in few limited categories of cases declared by the court to be cognizable, such as fraudulent actions of creditor or absurd or untenable claims by secured creditors. The ruling by Hon’ble SC concurs with Section 34 of SARFAESI Act and follows the rules laid in Section 9 of Civil Procedure Code, 1908. The current legal position helps in ensuring that there is no unnecessary interference by the civil courts in matters of recovery by banks and financial institutions and also that the powers of civil courts are not misused to delay or cause hindrances to the process of recovery by non-performing assets.

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This Article is authored by Mr. Atharva Jha, student at Amity Law School, Amity University Chhattisgarh.

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[1] Pranav Dabas, A Bank’s Comrade: An Overview of the SARFAESI Act, June 3, 2024, Metalegal Advocates (https://www.metalegal.in/post/a-bank-s-comrade-an-overview-of-the-sarfaesi-act)

[2] (2017) 2 SCC 622

[3] (2004) 4 SCC 311.

[4] MANU/SC/O426/2023

[5] (2004) 4 SCC 311