Supreme Court Restricts High Court Interference in SARFAESI Act Cases: South Indian Bank Ltd. vs. Naveen Mathew Philip (2023)

Date of the Judgment: April 17, 2023

Citation: 2023 INSC 379

Judges: Sanjiv Khanna, J., M.M. Sundresh, J.

Can High Courts intervene in cases where banks seek to recover loans under the SARFAESI Act, especially when a specific tribunal is available for such disputes? The Supreme Court of India recently addressed this crucial question, clarifying the extent of High Court’s powers in such financial matters. This judgment emphasizes the importance of using the remedies provided by the SARFAESI Act before approaching the High Court. The bench comprised Justices Sanjiv Khanna and M.M. Sundresh, with the majority opinion authored by Justice M.M. Sundresh.

Case Background

The respondents had taken two loans from the appellant bank: a housing/KCC overdraft loan and a business loan. Due to non-payment, these accounts were classified as Non-Performing Assets (NPA) on May 27, 2021. The bank then issued notices under Section 13(2) of the SARFAESI Act on August 7, 2021, and August 12, 2021, respectively. The respondents replied on October 28, 2021, requesting twelve months to repay the loan.

Within three days of their reply, and before the statutory period expired, the respondents filed Writ Petition No. 23940 of 2021, challenging the demand notice. The High Court directed the bank to consider the respondents’ proposal. Consequently, the bank allowed the respondents to repay in five installments. However, the respondents failed to utilize this extended benefit, leading the bank to issue notices under Section 13(4) of the SARFAESI Act on December 2, 2021, and December 20, 2021.

The respondents then filed two more writ petitions, Writ Petition Nos. 30238 of 2021 and 30450 of 2021, seeking a writ of certiorari and asking the High Court to direct the bank to accept their unilateral offers. It is important to note that while the Debt Recovery Tribunal was not functional when these petitions were filed, it became functional in March 2022.

Timeline

Course of Proceedings

The High Court, despite the Debt Recovery Tribunal becoming functional, decided the matter on merits. It allowed the respondents to make deferred payments in 20 installments, which was more than what they had initially requested. The Division Bench modified this to 12 months, as originally sought by the respondents, but did not interfere with the single judge’s decision on the merits of the case. The lender bank then appealed to the Supreme Court.

Legal Framework

This case primarily revolves around the interpretation and application of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), specifically Section 13(2) and Section 13(4) of the SARFAESI Act. Section 13(2) of the SARFAESI Act allows secured creditors to issue a notice to the borrower if their account is classified as a non-performing asset. Section 13(4) of the SARFAESI Act outlines the measures that a secured creditor can take if the borrower fails to respond to the notice under Section 13(2). The Supreme Court also considered Article 226 of the Constitution of India, which grants High Courts the power to issue writs.

The SARFAESI Act was enacted to provide a mechanism for banks and financial institutions to recover their dues quickly and efficiently, without the need for lengthy court proceedings. It establishes a Debt Recovery Tribunal (DRT) to handle such matters. The Act aims to expedite the recovery process and reduce the burden on the regular courts.

Arguments

Appellants’ (Bank) Submissions:

• The High Court should not have entertained the writ petitions under Article 226 of the Constitution of India, especially since an effective alternative remedy was available under the SARFAESI Act through the Debt Recovery Tribunal (DRT).
• Writ petitions involving private financial transactions are not maintainable.
• The SARFAESI Act’s objective of faster recovery is frustrated by repeated interference from High Courts.
• The High Court’s interference undermines the purpose of the SARFAESI Act, which provides a specific mechanism for resolving disputes between lenders and borrowers.
• The extraordinary jurisdiction of the High Court should not be invoked when an effective and efficacious alternative forum (the DRT) exists.
• The bank argued that repeated interference by the High Court was preventing them from recovering dues from defaulting borrowers.

Respondents’ (Borrowers) Submissions:

• At the time of filing the writ petitions, the Debt Recovery Tribunal was not functional, justifying the invocation of Article 226 of the Constitution of India.
• The power of the High Court under Article 226 cannot be taken away, regardless of the existence of a Tribunal.
• When extreme steps are taken by the bank, a litigant has no option but to approach the writ court.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a dedicated section. However, the core issue that the court addressed was:

• Whether the High Court should interfere in matters related to the SARFAESI Act under Article 226 of the Constitution when an effective alternative remedy is available through the Debt Recovery Tribunal.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several cases and legal provisions to support its decision. These authorities were considered to establish the principle that High Courts should not interfere in matters where an effective alternative remedy is available, particularly under the SARFAESI Act.

Judgment

The Supreme Court, while not disturbing the High Court’s order due to the fair stand taken by the appellants, reiterated the settled position of law. It emphasized that High Courts should not interfere in commercial matters where an effective and efficacious alternative forum (such as the Debt Recovery Tribunal) has been constituted by statute. The Court noted that the SARFAESI Act provides a complete mechanism for addressing disputes between lenders and borrowers, and this mechanism should be utilized before resorting to writ jurisdiction under Article 226 of the Constitution.

The Supreme Court also took judicial notice of the fact that certain High Courts continue to interfere in such matters, leading to a regular supply of cases before the Supreme Court. The Court reiterated that a writ of certiorari is to be issued when the process does not conform to the law or statute, and courts are not expected to substitute themselves with the decision-making authority. It also emphasized that a writ of mandamus cannot be issued in the absence of a legal right, and that a litigant cannot circumvent the statutory remedy by using the constitutional remedy as an alternative.

How each authority was viewed by the Court:

• Phoenix Arc Private Limited vs. Vishwa Bharati Vidya Mandir & Ors., (2022) 5 SCC 345: The Court used this case to support its view that writ petitions against private financial institutions under Article 226 are generally not maintainable when remedies under the SARFAESI Act are available.
• Federal Bank Ltd. vs. Sagar Thomas & Ors., (2003) 10 SCC 733: This case was used to emphasize that private banking companies are not typically subject to writ jurisdiction under Article 226.
• State Bank of India vs. Arvindra Electronics (P) Ltd., 2022 SCCOnline SC 1522: This was cited to reinforce the principle that High Courts should not interfere when an effective alternative remedy is available.
• United Bank of India vs. Satywati Tondon & Others, (2010) 8 SCC 110: The Court used this case to highlight that High Courts should not entertain petitions under Article 226 if an effective remedy is available under the SARFAESI Act.
• Authorized Officer, State Bank of Travancore & Another vs. Mathew K.C., (2018) 3 SCC 85: This case was used to reiterate that writ petitions should not be entertained if alternate statutory remedies are available, except in specific exceptions.
• Varimadugu OBI Reddy vs. B. Sreenivasulu & Others, (2023) 2 SCC 168: This was cited to deprecate the practice of High Courts entertaining writ petitions without exhausting statutory remedies.
• Hari Vishnu Kamath v. Syed Ahmad Ishaque , (1955) 1 SCR 1104: The Court used this case to explain the scope of a writ of certiorari and to clarify that it is not a substitute for an appeal.
• Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311: This case was cited to explain the objectives and reasons behind the SARFAESI Act, which is to facilitate a faster and smoother mode of recovery without court interference.
• Radha Krishan Industries v. State of H.P., (2021) 6 SCC 771: This case was used to reiterate the principles of alternative remedy and the exceptions to this rule, emphasizing the need to exhaust statutory remedies before approaching the High Court under Article 226.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to ensure the effective implementation of the SARFAESI Act and to prevent unnecessary interference by High Courts in matters where a specific statutory remedy is available. The Court emphasized the importance of adhering to the principles of statutory interpretation and the need to respect the legislative intent behind the SARFAESI Act. The court’s reasoning was also driven by the need to maintain consistency in judicial decisions and to avoid creating a situation where the High Courts become an alternative appellate forum for SARFAESI matters.

The Court’s reasoning was also influenced by the following:

• The availability of an effective alternative remedy through the Debt Recovery Tribunal (DRT) under the SARFAESI Act.
• The need to respect the legislative intent behind the SARFAESI Act, which is to provide a faster and more efficient mechanism for banks to recover their dues.
• The importance of adhering to the principle that writ jurisdiction should not be used as a substitute for statutory remedies.
• The concern that repeated interference by High Courts frustrates the objective of the SARFAESI Act and leads to delays in the recovery of public money.

Fact:Law Ratio

Logical Reasoning

Key Takeaways

• High Courts should refrain from interfering in matters related to the SARFAESI Act when an effective alternative remedy is available through the Debt Recovery Tribunal.
• Borrowers must first exhaust the remedies available under the SARFAESI Act before approaching the High Court under Article 226 of the Constitution.
• Private financial transactions should generally be resolved through statutory mechanisms, and writ jurisdiction should not be used as a substitute.
• The judgment aims to ensure the efficient implementation of the SARFAESI Act and prevent delays in the recovery of dues by banks and financial institutions.

Directions

The Supreme Court directed the Registry to mark a copy of the order to the High Court of Kerala and the High Court of Punjab & Haryana, emphasizing the need for these courts to adhere to the principles laid down in the judgment.

Specific Amendments Analysis

Not Applicable in this case.

Development of Law

The ratio decidendi of this case is that High Courts should not interfere in matters related to the SARFAESI Act when an effective alternative remedy is available through the Debt Recovery Tribunal. This decision reinforces the principle that statutory remedies should be exhausted before resorting to writ jurisdiction under Article 226 of the Constitution. This judgment does not introduce any new legal principles but reiterates and clarifies the existing legal position, emphasizing the need for judicial restraint in matters where specific statutory mechanisms are in place. This case clarifies the position of law and reinforces the previous position of law.

Conclusion

In conclusion, the Supreme Court’s judgment in M/S. South Indian Bank Ltd. & Ors. vs. Naveen Mathew Philip & Anr. Etc. Etc. reaffirms the principle that High Courts should not interfere in matters related to the SARFAESI Act when an effective alternative remedy is available through the Debt Recovery Tribunal. The judgment emphasizes the importance of adhering to statutory mechanisms and respecting the legislative intent behind the SARFAESI Act, which aims to provide a faster and more efficient way for banks and financial institutions to recover their dues. This decision serves as a reminder for High Courts to exercise judicial restraint and to ensure that writ jurisdiction is not used as a substitute for statutory remedies.