India: Bar On Civil Court To Entertain Matters Pertaning To The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002.

The division bench of the Bombay High Court (High Court) by its order dated 26 October 2018 in the matter of Axis Bank v Madhav Prasad Aggarwal and Ors (Appeal No 360 of 2017), reaffirmed the view that under the restriction set out in Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (Act), a civil court was barred from entertaining any suit and proceeding in respect of matters which the Debts Recovery Tribunal (DRT) and Debts Recovery Appellate Tribunal (DRAT) were empowered to determine under the Act.

The division bench was examining an order passed by a single judge of the High Court which rejected the contentions of Axis Bank that it could not be impleaded as a party in the civil suit as the civil court could have no jurisdiction in the matter covered under Section 34 of the Act.

Background

The Plaintiffs in the Suit filed before the learned single judge claimed that they were allottees of flats who had paid substantial amounts to the developers i.e. Orbit Corporation Limited (defendants in the Suit) for purchase of flats in a project known as 'Orbit Heaven' located at Napeansea Road, Mumbai (Property). Though the Plaintiffs did not have registered agreements/documents for purchase of the flats, they contended that they had valuable rights in the Property.

In 2009, the developers availed a loan for an amount of INR 150 crores from Axis Bank. The loan was secured by registered deed(s) of mortgage in the Property in favour of Axis Bank. Due to default of the developer in re-payment of the loan, Axis Bank recalled the credit facilities and initiated proceedings under Section 13 of the Act for enforcing the security interest created in its favour in the Property.

Due to non-compliance of the notice under Section 13 of the Act by the developer, Axis Bank took symbolic possession of the Property i.e. the semi constructed Property. Axis Bank also initiated recovery proceedings before the DRT at Mumbai, when certain interim reliefs were granted in its favour against the developers.

During the pendency of the proceedings before the DRT, the Plaintiffs filed a commercial suit before the learned single judge inter alia for a declaration that the agreement between the developers and the Plaintiff was valid and subsisting, for specific performance of the agreement. Further, as an alternative remedy, the Plaintiffs sought damages against the developers. The Plaintiffs impleaded Axis Bank as a defendant in the Suit, though there was no privity of contract between the Plaintiffs and Axis Bank. Thus, to challenge this impleadment, Axis Bank filed a notice of motion before the learned single judge under Order VII Rule 11 (d) of the Code of Civil Procedure, 1908 (Code), contending that the Suit filed by the Plaintiffs was barred under Section 34 of the Act and the same should be rejected as far as Axis Bank was concerned.

The learned single judge rejected the notice of motion of Axis Bank whilst inter alia holding that there were sufficient averments in the plaint indicating collusion between the officers of Axis Bank and the developer. This would support a case of fraud as pleaded by the Plaintiff, which falls within the exception, culled out by the Hon'ble Supreme Court (Supreme Court) in the case of Mardia Chemicals Ltd. & Ors. v Union of India & Ors [(2004) 4 SCC 311)] (Mardia Case).

Axis Bank challenged this order in an appeal before a division bench of the High Court (Appeal).

Contentions raised by Axis Bank (Appellant) in the Appeal before the division bench:

  • The Appellant while placing reliance on the decisions of the Supreme Court in the Mardia Case and Jagdish Singh v Heeralal & Ors [(2014) 1 SCC 479] contended that the plaint was liable to be rejected in view of the express statutory bar, created by Section 34 of the Act, on a civil court from entertaining proceedings in respect of matters which the DRT or DRAT are empowered to determine by or under the Act. The remedy available to the Plaintiffs (i.e. respondents in the Appeal), if aggrieved, would be under Section 17 of the Act. It was also contended that the Appellant being a secured creditor had a superior right, and that unregistered agreements between the Plaintiffs and developers would not create any right so as to affect the security interest of the Appellant.
  • Mere allegation of fraud without any further substantiation by the Plaintiffs for the sole purpose of bringing a civil suit was not sufficient. The Plaintiffs are required to make out a clear case of fraud against the Appellant as laid down in the Mardia Case.
  • In the event a suit of this nature was entertained by a civil court, the same would frustrate the legislative intent of a remedy provided under Section 17 of the Act.

Contentions raised by the Plaintiff (i.e. the Respondents) in the Appeal before the division bench

  • The power to pass an order under Order VII Rule 11 of the Code is a discretionary power and the division bench could only interfere with such an order if it concluded that the order passed by the learned single judge was either not a possible, probable or plausible view, even if it was not an absolutely correct view.
  • The developer and Appellant were acting in collusion, and the Appellant advanced the loan without proper due diligence, since as per Section 55 of the Transfer of Property Act, 1882, the Plaintiffs being the flat purchasers would have a prior charge over the flats.
  • That it was not necessary for the Plaintiffs to have a registered agreement as contemplated by the provisions of the Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (MOFA).
  • The Plaintiffs could approach the DRT under Section 17 of the Act only if possession of the flats were to be with the Plaintiffs which was absent in the present case.
  • The Appellant would be a necessary party in the event a decree for specific performance of conveyance was to be passed against the developer.

Judgment of the Division Bench

  • The High Court concurred with the contentions of the Appellant and relied on various judgments of the Supreme Court and High Courts while interpreting Order VII Rule 11 of the Code to hold that the power provided to the Courts is not discretionary and rather is obligatory in nature. Hence, once the application fulfills all the requirements of the rule, the Court is obliged to reject the plaint.
  • The High Court also interpreted Section 34 of the Act and held that the jurisdiction of a civil court was expressly barred in all matters wherein cognizance may be taken by DRT/DRAT.
  • The Appellant as a mortgagee derived its rights from the Act and was fully entitled to realise its dues under the special statute. Once there was a valid and subsisting mortgage and there was a default on the part of the developer, there would be no illegality on the part of the Appellant to initiate recovery measures under the Act.
  • In order to claim the rights of MOFA, registration of the agreement and payment of stamp duty were not only germane but also mandated under law. Further, the suits were primarily filed by the Plaintiffs against the developers only after the Appellant had initiated measures under the Act, despite claiming to have parted with substantial amounts. This casts serious doubts on the actual intention of the Plaintiffs. It was clear that the reason for impleading the Appellant as party in the Suit was to prevent enforcement of the security interest created in the Property.
  • In any event, the Plaintiffs were not left remediless, as Section 17 of the Act entitled 'any person' to approach the DRT against the measures taken by a secured creditor under Section 13 of the Act.
  • The Division Bench also agreed with the contention of the Appellant that in the absence of an unsubstantiated plea of fraud against the Appellant, the plaint against the Appellant is liable to be rejected following the principles laid down in the Mardia Case.
  • Thus, the division bench held that the learned single judge erred in holding that the plaint against the Appellant was not barred under Section 34 of the Act and consequently in rejecting the notices of motion of the Appellant. The division bench set aside the order of the learned single judge and allowed the notices of motion filed by the Appellant.

KCO Comments

As it has been held by the Supreme Court in Transcore v Union of India & Anr [(2008) 1 SCC 125] and looking to the objects of the Act, it can be gathered that the Act was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest. The Act provides a means by which financial institutions and banks can realise long term stressed assets and improve recovery of debts by exercising powers under the Act, more particularly enforcement of security interest created in favour of financial institutions and banks, without intervention of the court or tribunal.

Thus, the financial institutions and banks cannot be deemed to be at fault in taking recourse to the provisions of the Act by issuing notice under Section 13(2) and taking measures under Section 13(4) to enforce the security interest and realise the amounts due and payable on default of the borrower in repayment of loan facilities.

Considering all the circumstances, the rule is that jurisdiction of a civil court is barred in respect of any matter which a DRT/DRAT is empowered to determine under the Act. Very limited and exceptional cases, for instance the fraudulent actions of the financial institution and bank, would allow for the jurisdiction of a civil court to be invoked.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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