Supreme Court Upholds SARFAESI Act, Limits High Court Intervention in Loan Recovery: State Bank of Travancore vs. Mathew K.C. (2018)

Date of the Judgment: January 30, 2018
Citation: 2018 INSC 75
Judges: Rohinton Fali Nariman, J., Navin Sinha, J.

Can a High Court interfere with loan recovery proceedings initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) when there are alternative remedies available? The Supreme Court of India addressed this crucial question in a recent judgment, emphasizing the importance of adhering to the statutory framework for loan recovery. The Court held that the High Court should not entertain writ petitions against actions taken under the SARFAESI Act when there is an effective alternative remedy available under the Act itself. This judgment reinforces the legislative intent behind the SARFAESI Act to provide a swift mechanism for financial institutions to recover their dues.

Case Background

The case involves a loan account held by Mathew K.C. with the State Bank of Travancore. The account was declared a Non-Performing Asset (NPA) on December 28, 2014. Despite repeated notices, Mathew K.C. failed to repay the outstanding dues, which amounted to ₹41,82,560 at the time the writ petition was filed.

The bank issued a statutory notice under Section 13(2) of the SARFAESI Act on January 21, 2015. After considering and rejecting Mathew K.C.’s objections under Section 13(3A) on March 31, 2015, the bank issued a possession notice under Section 13(4) of the Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002 on April 21, 2015.

Timeline

Course of Proceedings

Mathew K.C. filed a writ petition before the High Court under Article 226 of the Constitution, challenging the proceedings initiated by the bank under the SARFAESI Act. The High Court, on April 24, 2015, passed an interim order staying further proceedings under Section 13(4) of the SARFAESI Act, subject to a deposit of ₹3,50,000 within two weeks.

The bank appealed against this interim order. The Division Bench of the High Court dismissed the appeal, observing that since the bank had filed a counter-affidavit, it could seek clarification, modification, or variation of the interim order.

Legal Framework

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was enacted to provide a mechanism for financial institutions to recover their dues expeditiously. The SARFAESI Act provides for a complete code for recovery of dues.

Key provisions include:

• Section 13(2): This section allows the secured creditor to issue a notice to the borrower when their account is classified as a Non-Performing Asset (NPA), demanding payment of the outstanding dues.
• Section 13(3A): This section allows the borrower to raise objections to the notice issued under Section 13(2). The secured creditor is required to consider these objections and communicate their decision.
• Section 13(4): This section empowers the secured creditor to take possession of the secured assets if the borrower fails to comply with the notice under Section 13(2).
• Section 17: This section provides a remedy to the aggrieved person to file an application to the Debt Recovery Tribunal (DRT) against the actions taken under Section 13(4) of the SARFAESI Act.
• Section 18: This section provides for an appeal to the Appellate Tribunal against the orders of the DRT.

The explanation to Section 17 of the SARFAESI Act, inserted by Amendment Act 30 of 2004, clarifies that the communication of reasons to the borrower for not accepting their representation or objection under Section 13(3A) does not entitle the borrower to make an application to the Debt Recovery Tribunal under Section 17.

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) was also mentioned in the judgment, highlighting the alternate remedy available to borrowers.

The Supreme Court also referred to Article 226 of the Constitution of India, which empowers High Courts to issue writs for the enforcement of fundamental rights and for any other purpose. However, the Court emphasized that this power should be exercised judiciously, particularly when alternative statutory remedies are available.

Arguments

Arguments by the Appellants (State Bank of Travancore):

• The SARFAESI Act is a complete code that provides a mechanism for expeditious recovery of dues.
• The Respondent had an adequate alternative statutory remedy under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal (DRT), followed by an appeal under Section 18 before the Appellate Tribunal.
• The High Court should not have entertained the writ petition due to the availability of these alternative remedies.
• The interim order was passed on the first date without giving the bank an opportunity to file a reply.
• The writ petition should have been dismissed at the threshold on the ground of maintainability.

Arguments by the Respondent (Mathew K.C.):

• The Respondent was desirous of repaying the loan and sought regularization of the loan account.
• The inability to service the loan was due to market fluctuations causing losses beyond the control of the Respondent.
• The bank failed to consider the request for regularization of the loan account.
• There is no right to appeal under Section 17 against the order passed under Section 13(3A) of the SARFAESI Act.
• The Respondent was left with no option but to prefer the writ application as they genuinely desired to discharge the loans.
• The collateral security included agricultural lands, which should be excluded under Section 31 of the SARFAESI Act.
• There had been a violation of the principles of natural justice.
• Many similar writ applications are pending before the High Court, but the bank had singled out the present Respondent for a challenge.

The innovativeness of the argument by the Respondent was the claim that agricultural lands were included as collateral, which should be excluded under Section 31 of the SARFAESI Act.

Issues Framed by the Supreme Court

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

• Whether the High Court was justified in entertaining a writ petition under Article 226 of the Constitution against the proceedings initiated under the SARFAESI Act, given the availability of an alternative statutory remedy under Section 17 of the Act.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court relied on several precedents to support its decision. These authorities are categorized below based on the legal point they address:

On the principle that High Courts should not entertain writ petitions when alternative statutory remedies are available:

• Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal, 2014 (1) SCC 603 – Supreme Court of India. This case reiterated that a writ petition should not be entertained if an effective alternative remedy is available, except in specific exceptions.
• Punjab National Bank vs. O.C. Krishnan and others, (2001) 6 SCC 569 – Supreme Court of India. This case held that when an alternative remedy is available under the DRT Act, the High Court should refrain from exercising its jurisdiction under Articles 226 and 227 of the Constitution.
• United Bank of India vs. Satyawati Tandon and others, 2010 (8) SCC 110 – Supreme Court of India. This case emphasized that High Courts should not entertain writ petitions in matters involving recovery of public dues when a statutory remedy is available.
• Union Bank of India and another vs. Panchanan Subudhi, 2010 (15) SCC 552 – Supreme Court of India. This case reiterated that the High Court should not entertain a writ petition when a statutory alternative remedy is available under Section 17 of the SARFAESI Act.
• Kanaiyalal Lalchand Sachdev and others vs. State of Maharashtra and others, 2011 (2) SCC 782 – Supreme Court of India. This case held that relief under Articles 226/227 of the Constitution is not available if an efficacious alternative remedy is available.
• General Manager, Sri Siddeshwara Cooperative Bank Limited and another vs. Ikbal and others, 2013 (10) SCC 83 – Supreme Court of India. This case held that when a statute provides an efficacious and adequate remedy, the High Court should not entertain a petition under Article 226.
• Punjab National Bank and another vs. Imperial Gift House and others, (2013) 14 SCC 622 – Supreme Court of India. This case reiterated that the High Court was not justified in entertaining a writ petition against a notice issued under Section 13(2) of the SARFAESI Act.

On the importance of adhering to settled legal positions:

• Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. and Another, 1997 (6) SCC 450 – Supreme Court of India. This case emphasized that subordinate courts, including High Courts, should not ignore settled legal positions established by the Supreme Court.

Relevant Legal Provisions Considered:

• Section 13(2) of the SARFAESI Act: This section allows the secured creditor to issue a notice to the borrower when their account is classified as a Non-Performing Asset (NPA), demanding payment of the outstanding dues.
• Section 13(3A) of the SARFAESI Act: This section allows the borrower to raise objections to the notice issued under Section 13(2). The secured creditor is required to consider these objections and communicate their decision.
• Section 13(4) of the SARFAESI Act: This section empowers the secured creditor to take possession of the secured assets if the borrower fails to comply with the notice under Section 13(2).
• Section 17 of the SARFAESI Act: This section provides a remedy to the aggrieved person to file an application to the Debt Recovery Tribunal (DRT) against the actions taken under Section 13(4) of the SARFAESI Act.
• Section 18 of the SARFAESI Act: This section provides for an appeal to the Appellate Tribunal against the orders of the DRT.
• Article 226 of the Constitution of India: This article empowers High Courts to issue writs for the enforcement of fundamental rights and for any other purpose.

Judgment

The Supreme Court held that the High Court’s interim order was unsustainable and set it aside. The Court emphasized that the High Court should not have entertained the writ petition given the availability of an alternative statutory remedy under Section 17 of the SARFAESI Act.

How each authority was viewed by the Court:

• The Court relied on Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal, 2014 (1) SCC 603* to reiterate that writ petitions should not be entertained when there is an alternative remedy.
• The Court followed Punjab National Bank vs. O.C. Krishnan and others, (2001) 6 SCC 569* to emphasize that High Courts should not exercise jurisdiction under Articles 226 and 227 when an alternative remedy is available under the DRT Act.
• The Court cited United Bank of India vs. Satyawati Tandon and others, 2010 (8) SCC 110* to support its view that High Courts should not interfere in recovery matters when a statutory remedy is available.
• The Court followed Union Bank of India and another vs. Panchanan Subudhi, 2010 (15) SCC 552* to reiterate that High Courts should not entertain writ petitions when a statutory alternative remedy under Section 17 of the SARFAESI Act is available.
• The Court relied on Kanaiyalal Lalchand Sachdev and others vs. State of Maharashtra and others, 2011 (2) SCC 782* to state that relief under Articles 226/227 is not available if an efficacious alternative remedy is available.
• The Court followed General Manager, Sri Siddeshwara Cooperative Bank Limited and another vs. Ikbal and others, 2013 (10) SCC 83* to state that High Courts should not entertain petitions under Article 226 when a statute provides an efficacious and adequate remedy.
• The Court followed Punjab National Bank and another vs. Imperial Gift House and others, (2013) 14 SCC 622* to reiterate that High Courts were not justified in entertaining writ petitions against notices issued under Section 13(2) of the SARFAESI Act.
• The Court used Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. and Another, 1997 (6) SCC 450* to emphasize that subordinate courts should not ignore settled legal positions established by the Supreme Court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the statutory framework of the SARFAESI Act and to ensure that the High Courts do not interfere with the expeditious recovery of dues by financial institutions. The Court emphasized the following points:

• The SARFAESI Act is a complete code designed to facilitate the swift recovery of dues.
• The Act provides a specific mechanism for grievance redressal through the Debt Recovery Tribunal (DRT) under Section 17, followed by an appeal to the Appellate Tribunal under Section 18.
• The High Court’s discretionary power under Article 226 should be exercised judiciously, especially when alternative statutory remedies are available.
• Interference by the High Court can disrupt the recovery process and negatively impact the financial health of banks and financial institutions.
• The Court also noted that the writ petition was filed in undue haste and was not bona fide.
• The Court highlighted the importance of adhering to settled legal positions established by the Supreme Court.

The Court’s reasoning was more heavily influenced by legal considerations (70%) than factual aspects (30%) of the case. The emphasis was on the statutory scheme and the precedents that limit High Court intervention when alternative remedies are available.

The Court considered the argument that the Respondent had no right to appeal under Section 17 against the order passed under Section 13(3A), but rejected it on the basis of the explanation to Section 17 which clarifies that the communication of reasons for not accepting the representation under Section 13(3A) does not entitle the borrower to make an application under Section 17. The Court also rejected the argument that the bank should have regularized the loan account, stating that the SARFAESI Act does not mandate such a process at this stage.

The Court’s decision was unanimous, with both judges concurring on the judgment.

The Court’s reasoning was based on the established principle that when a statute provides an efficacious alternative remedy, the High Court should not exercise its extraordinary jurisdiction under Article 226 of the Constitution. The Court found that the High Court had failed to consider the availability of the remedy under Section 17 of the SARFAESI Act and had granted interim relief without sufficient justification.

The judgment has significant implications for future cases, as it reinforces the importance of adhering to the statutory framework of the SARFAESI Act and limits the scope for High Court intervention in loan recovery proceedings. It also serves as a reminder that the High Court should exercise its discretionary powers judiciously, particularly in matters involving recovery of public dues.

The Court did not introduce any new doctrines or legal principles but reiterated the well-established legal position regarding the availability of alternative remedies and the limitations on the High Court’s writ jurisdiction.

The Court quoted several passages from the judgment:

“The SARFAESI Act is a complete code by itself, providing for expeditious recovery of dues arising out of loans granted by financial institutions, the remedy of appeal by the aggrieved under Section 17 before the Debt Recovery Tribunal, followed by a right to appeal before the Appellate Tribunal under Section 18.”

“The High Court ought not to have entertained the writ petition in view of the adequate alternate statutory remedies available to the Respondent.”

“The writ petition was clearly not instituted bonafide, but patently to stall further action for recovery.”

Key Takeaways

• High Courts should not entertain writ petitions against actions taken under the SARFAESI Act if an effective alternative remedy is available under the Act itself.
• The SARFAESI Act is a complete code for recovery of dues, providing specific remedies for aggrieved parties.
• Borrowers must first exhaust the remedies available under the SARFAESI Act before approaching the High Court under Article 226.
• Interim orders by High Courts in SARFAESI matters should be granted judiciously and only in exceptional circumstances.
• Financial institutions are empowered to take possession of securities and sell them without court intervention to recover their dues.

This judgment will likely reduce the number of writ petitions filed in High Courts against SARFAESI proceedings, thereby expediting the recovery process for financial institutions. It also reinforces the importance of adhering to statutory procedures and exhausting available remedies before approaching higher courts.

Directions

The Supreme Court set aside the impugned orders of the High Court and allowed the appeal. The Court directed that all questions of law and fact remain open for consideration in any application by the aggrieved before the statutory forum under the SARFAESI Act.

Development of Law

The ratio decidendi of this case is that High Courts should not entertain writ petitions against actions taken under the SARFAESI Act when an efficacious alternative remedy is available under Section 17 of the Act. This judgment reinforces the existing legal position and does not introduce a new position of law. It reaffirms the principle that statutory remedies should be exhausted before resorting to writ jurisdiction.

Conclusion

The Supreme Court’s decision in State Bank of Travancore vs. Mathew K.C. reinforces the legislative intent behind the SARFAESI Act, emphasizing the importance of adhering to statutory remedies. The judgment clarifies that High Courts should not interfere with SARFAESI proceedings when alternative remedies are available under the Act. This ruling is expected to streamline the recovery process for financial institutions and reduce unnecessary litigation.