Supreme Court Clarifies Jurisdiction in Mortgage Disputes Under SARFAESI Act: State Bank of India vs. Allwyn Alloys Pvt. Ltd. (2018)

Date of the Judgment: May 17, 2018
Citation: 2018 INSC 445
Judges: Dipak Misra, CJI, A.M. Khanwilkar, J., Dr. D.Y. Chandrachud, J.

Can a civil court interfere in matters related to secured assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)? The Supreme Court addressed this crucial question in a case involving a dispute over a mortgaged property. This judgment clarifies that the Debts Recovery Tribunal (DRT) and Debts Recovery Appellate Tribunal (DRAT) have exclusive jurisdiction in such matters, barring civil courts from entertaining related suits. The bench consisted of Chief Justice Dipak Misra and Justices A.M. Khanwilkar and Dr. D.Y. Chandrachud, with the judgment authored by Justice A.M. Khanwilkar.

Case Background

This case revolves around a property dispute concerning Flat No. C-203 in Mumbai. The flat was mortgaged to State Bank of India (the appellant) by the directors of M/s. Allwyn Alloys Pvt. Ltd. (respondent No. 1) as security for a loan. The directors, Mrs. Zahoor K. Dhanani, Mr. Karim K. Dhanani, and Mrs. Habika K. Dhanani (respondents 2-4), created an equitable mortgage on the property. Subsequently, respondents 5 and 6 claimed ownership of the flat based on a Memorandum of Understanding (MoU) dated March 13, 2011, asserting that the flat was to be resold to them. The Bank initiated proceedings under the SARFAESI Act to recover the loan by auctioning the mortgaged property.

Timeline:

Course of Proceedings

The Debts Recovery Tribunal (DRT) and the Debts Recovery Appellate Tribunal (DRAT) both ruled against respondents 5 and 6, stating that the MoU was created after the equitable mortgage and was unregistered, thus not conferring any ownership rights. They also noted that the share certificate of the flat was already transferred to the names of the directors (respondents 2-4), who had mortgaged the flat to the bank. The High Court of Judicature at Bombay, however, allowed respondents 5 and 6 to approach a competent forum for adjudication of their rights, stating that the matter involved disputed facts requiring a full-fledged trial. The High Court also directed the Bank to deposit ₹25 lakhs in an interest-earning account.

Legal Framework

The Supreme Court primarily focused on Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This section explicitly bars civil courts from exercising jurisdiction over matters that a DRT or DRAT is empowered to determine under the SARFAESI Act. Specifically, Section 34 of the SARFAESI Act states:

“34. Civil court not to have jurisdiction.—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 by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993).”

Arguments

Appellant (State Bank of India) Arguments:

• The appellant argued that the High Court erred in allowing respondents 5 and 6 to approach a civil court, as Section 34 of the SARFAESI Act bars civil courts from entertaining such matters.
• The appellant contended that the DRT and DRAT had already examined the case’s merits and correctly ruled against respondents 5 and 6.
• The appellant emphasized that the concurrent findings of fact by the DRT and DRAT established that respondents 5 and 6 failed to prove any right, title, or interest in the flat.
• The appellant argued that the High Court’s direction to deposit ₹25 lakhs was unjustified.

Respondent (M/s. Allwyn Alloys Pvt. Ltd. & Ors.) Arguments:

• Respondents 5 and 6 argued that they had a valid claim to the flat based on the Memorandum of Understanding (MoU) dated March 13, 2011.
• They contended that respondent No. 5 was in physical possession of the flat and held the original share certificate and payment receipts.
• They alleged that the entries in the Society’s records transferring the share certificate to respondents 2-4 were fabricated.
• They argued that the matter involved disputed facts requiring a full-fledged trial, justifying the High Court’s decision to allow them to approach a competent forum.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

1. Whether the High Court was correct in allowing the writ petitioners (respondents 5 and 6) to approach a civil court for adjudication of their rights, title, and interest in the mortgaged property, given the provisions of the SARFAESI Act.

Treatment of the Issue by the Court

Authorities

The Court primarily relied on the following:

• Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): This provision was central to the court’s decision, as it explicitly bars civil courts from entertaining matters under the jurisdiction of the DRT and DRAT.

Judgment

How each authority was viewed by the Court?

• Section 34 of the SARFAESI Act: The Court relied on this section to emphasize that civil courts lack jurisdiction in matters covered by the SARFAESI Act. The court held that the High Court’s decision to allow the writ petitioners to approach a civil court was incorrect, as it directly contravened Section 34 of the SARFAESI Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the statutory bar imposed by Section 34 of the SARFAESI Act. The Court emphasized that the DRT and DRAT have exclusive jurisdiction over matters related to secured assets under the Act, and civil courts cannot interfere. The Court also noted that the High Court had not analyzed the merits of the case but had instead focused on the need for a full-fledged trial, which was not justified given the statutory framework.

Logical Reasoning

The Court found that the High Court’s approach was flawed because it did not consider the statutory bar under Section 34 of the SARFAESI Act, which clearly states that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or DRAT is empowered to determine. The Court emphasized that the DRT and DRAT have exclusive jurisdiction over matters related to secured assets under the Act and that the High Court should have addressed the merits of the case within this framework rather than allowing a separate civil suit.

The Court also highlighted that the High Court did not analyze the concurrent findings of fact recorded by the DRT and DRAT, which had already determined that respondents 5 and 6 had failed to establish any right, title, or interest in the subject flat. The Supreme Court noted that the High Court’s decision to allow a civil suit would undermine the purpose of the SARFAESI Act, which is to provide a swift and efficient mechanism for the recovery of debts by banks and financial institutions.

The Supreme Court set aside the High Court’s order, emphasizing that the High Court should have addressed the merits of the case within the framework of the SARFAESI Act. The Supreme Court also found the High Court’s direction to deposit ₹25 lakhs was unjustified. The Supreme Court restored the writ petition to the file of the High Court, directing it to be decided on its own merits and in accordance with the law, and requested the High Court to dispose of the writ petition expeditiously.

The Supreme Court quoted:

“the mandate of Section 13 and, in particular, Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, “ the 2002 Act”) , clearly bars filing of a civil suit.”

“no civil court can exercise jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or DRAT is empowered by or under this Act to determine and no injunction can be granted by any Court or authority in respect of any action taken or to be taken in pursuance of any power conferred by or under the Act.”

“The approach of the High Court as already noted hitherto is completely fallacious and untenable in law.”

There were no dissenting opinions.

Key Takeaways

• Civil courts cannot entertain suits related to secured assets under the SARFAESI Act.
• The Debts Recovery Tribunal (DRT) and Debts Recovery Appellate Tribunal (DRAT) have exclusive jurisdiction in such matters.
• High Courts should address the merits of cases within the framework of the SARFAESI Act rather than allowing separate civil suits.
• Orders directing banks to deposit money without a clear legal basis are not permissible.

Directions

The Supreme Court restored Writ Petition No. 7480 of 2014 to the file of the High Court, directing it to be decided on its own merits and in accordance with the law. The High Court was requested to dispose of the writ petition expeditiously, preferably by the end of July 2018.

Development of Law

The ratio decidendi of this case is that Section 34 of the SARFAESI Act bars civil courts from exercising jurisdiction over matters that fall under the purview of the DRT and DRAT. This judgment reinforces the exclusive jurisdiction of the DRT and DRAT in matters related to secured assets under the SARFAESI Act, preventing parallel civil proceedings and ensuring efficient debt recovery.

Conclusion

The Supreme Court’s decision in State Bank of India vs. Allwyn Alloys Pvt. Ltd. clarifies that civil courts cannot entertain suits related to secured assets under the SARFAESI Act. The judgment emphasizes the exclusive jurisdiction of the DRT and DRAT in such matters, ensuring a streamlined process for debt recovery and preventing conflicting rulings from different forums. The High Court’s order was set aside, and the matter was remanded for reconsideration within the framework of the SARFAESI Act.

Category:

Parent Category: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Child Category: Section 34, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

FAQ

Q: What is the SARFAESI Act?
A: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is an Indian law that allows banks and financial institutions to recover their dues by auctioning the mortgaged properties of defaulters, without the intervention of the court.

Q: What is the significance of Section 34 of the SARFAESI Act?
A: Section 34 of the SARFAESI Act bars civil courts from exercising jurisdiction over matters that a Debts Recovery Tribunal (DRT) or Debts Recovery Appellate Tribunal (DRAT) is empowered to decide under the Act. This ensures that disputes related to secured assets are resolved by specialized tribunals.

Q: What does this judgment mean for property owners who have mortgaged their property?
A: This judgment means that if there’s a dispute related to a property that has been mortgaged to a bank or financial institution, any legal recourse must be sought through the DRT or DRAT, not a civil court.

Q: Can a civil court interfere if a bank is trying to auction a mortgaged property?
A: No, according to this judgment, civil courts cannot interfere in matters where the DRT or DRAT has jurisdiction. Any dispute regarding the auction or the mortgage must be addressed by the DRT or DRAT.

Q: What should I do if I have a dispute with a bank regarding a mortgaged property?
A: You should approach the Debts Recovery Tribunal (DRT) or the Debts Recovery Appellate Tribunal (DRAT) for resolution, as civil courts do not have jurisdiction in such matters.