Wresting the jurisdiction of Civil Courts in Securitisation matters – Improper?

Wresting the jurisdiction of Civil Courts in Securitisation matters – Improper?

Bar & Bench

M Dhyan Chinnappa

The question with respect to the scope of power of the Debts Recovery Tribunal (DRT) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) assumes significance in view of a recent judgment of the Supreme Court in Authorised Officer v. Allwyn Alloys Pvt Ltd (Allwyn Alloys case).

The Supreme Court held that in respect of mortgaged property where action is taken under the Securitisation Act, it is only the DRT which can adjudicate all issues concerning the right, title and interest in relation to the said property. This finding seems rather broad and difficult to accept, although in the Allwyn Alloys case, it was a possible conclusion on facts that could be drawn.

In the Allwyn Alloys case, an apartment was sold by certain persons (Original Owners) under a registered sale deed to the mortgagors. When the bank took action in terms of the SARFAESI Act, the same was resisted by the Original Owners before the DRT, which held that the Original Owners had not established their right in respect of the mortgaged property. It was concluded that the property was properly mortgaged in favour of the bank. This was affirmed by the Appellate Authority (DRAT) as well.

The Division Bench of the Bombay High Court, however, concluded that there were various disputed questions of fact which required adjudication in a full-fledged trial. Liberty was granted to approach the appropriate forum to adjudicate the rights of the Original Owners who were indisputably in possession of the mortgaged property. This liberty so granted was set aside by the Supreme Court on the premise that Section 34 bars any such suit.

A similar view is expressed in earlier judgments in Jagadish Singh v. Heerala and followed in Sree Anandhakumar Mills v. Indian Overseas Bank. In Jagadish Singh, a suit for partition was held to be not maintainable on the ground that the remedy of the person so aggrieved was only to challenge the action of the bank in a proceeding under Section 17 of the Securitisation Act. The Supreme Court held that the jurisdiction of the Civil Court is completely barred.

In Sree Anandhakumar Mills, the Supreme Court followed Jagadish Singh and held that a suit for partition which was found to be maintainable by the Madras High Court was not maintainable in view of Section 17 of the Securitisation Act. Jagadish Singh relied on the judgment in Mardia Chemicals Ltd v. Union of India which considered an argument on Section 34 albeit in a slightly different scenario.

The purpose of this article is to analyse if the finding that the Securitisation Act bars the jurisdiction of the Civil Court entirely is correct.

The DRT is a forum with limited jurisdiction. The DRT acting under the Securitisation Act, does not (rather cannot) examine questions of title. The limit of the jurisdiction of the DRT is only to examine the question as to whether the measures taken in terms of Section 13 of the Securitisation Act is “in accordance with the provisions of this Act and the rules made thereunder”. Section 17(2) makes this position apparent. This is the limit on the power of the DRT.

In terms of Section 17(3), the DRT “after examining the facts and circumstances of the case and evidence produced by the parties” and if it concludes that any of the measures “are not in accordance with the provisions of this Act and the rules made thereunder … it may by order….

Section 34 of the Securitisation Act bars the jurisdiction of the Civil Court in a limited manner. The Civil Court cannot entertain any suit or proceeding in respect of a matter which the DRT or the DRAT is empowered under the Securitisation Act to determine and no injunction can be granted in respect of any action taken in pursuance of any power conferred by the Securitisation Act. The bar on the power of a Civil Court is not absolute but is only with respect to matters covered under the Securitisation Act. So long as the Civil Court is not examining a question involving the legality of the action taken by a Bank under Section 13, all other issues are certainly not hit by Section 34 of the Act.

Although Section 37 provides that the Securitisation Act is in addition to and not in derogation of various laws as specified therein and “any other law for the time being in force”, this part of Section 37 has been read down by the Supreme Court in M/s Madras Petrochem v BIFR and others to mean “other laws having relation to the securities market only”.

That the conclusion drawn by the Supreme Court may not be entirely correct will become evident from the following examples:

a. Property is mortgaged by A, the rightful owner of which is B. B challenges the proceedings initiated by a bank. The DRT exercising power under Section 17 cannot determine the inter-se dispute between A and B. Even where the DRT holds that the measures taken by the Bank are in accordance with the provisions of the Securitisation Act and Rules, the question as to who is the real owner cannot be adjudicated. Ownership, after all is a bundle of rights. If a rightful owner files a suit for declaration of ownership, when proceedings are pending under the Securitisation Act, to say that the rightful owner has no right to file a suit and would be bound by the finding by a Tribunal of limited jurisdiction is to do violence to the plain reading of Section 34 and Section 17 of the Act.

b. A dissolved partnership firm’s property is mortgaged by the erstwhile partner acting in his personal capacity. The other partners object to the proceedings taken by a Bank stating that accounts are not yet settled. The DRT does not have the jurisdiction to answer the questions so raised. If the DRT is the only Tribunal where an application can be made, the DRT should have the powers of a Civil Court to return an answer on the status of the persons concerned.

c. A portion of the mortgaged property is acquired by the Government and there is a dispute as to which portion of the mortgaged property is acquired. The DRT cannot answer this issue as this will require evidence.

d. Joint family property is mortgaged by a co-parcener and not the Karta of the family. On other co-parceners objecting to the mortgage in proceedings under Section 17, the DRT cannot adjudicate whether the mortgage is proper or not. Although such suits are held to be barred, if the other co-parceners approach the DRT, the question that arises (and has not been answered by the Supreme Court) is whether the DRT can then determine the shares of the co-parceners and limit the mortgage to the extent of the share of one of the co-parceners.

e. Boundary disputes, identity and location of the property are all complex matters involving trial and detailed evidence and cannot be adjudicated by the DRT having limited jurisdiction.

In each of the above scenarios and multifarious others, the DRT can merely determine the question of whether the action taken is in accordance with the provisions of the Securitisation Act (and possibly ancillary issues) but cannot answer questions which are beyond the scope of the power vested in it under the Securitisation Act. It is only with respect to this limited jurisdiction that the power of
the Civil Court is excluded.

However, a criticism to this view may be that it creates multiplicity of proceedings which requires to be avoided. In addition, Section 17 allows any person to challenge the action taken under Section 13(4) and it could be argued that therefore a wide interpretation of the scope of the power exercisable by the DRT under Section 17 should be taken. This wide language (of “any person”) is what led to the Supreme
Court holding that the DRT becomes an exclusive forum for matters which involve mortgaged property. This may be a tenable argument if not for the limitation placed on the exercise of power in terms of Section 17(2). Even if one were to accept the argument, the DRT cannot examine detailed questions of title and can only deal with cases which are apparent on the face of the record. Had the power of the Civil Court been vested with the DRT, one may be able to state that the DRT exercising such power would bar the Civil Court. But when in letter, Section 17 does not confer power of a Civil Court, to hold suits to be barred is incorrect.

There is yet another scenario which requires to be addressed. Even prior to initiation of proceedings under the Securitisation Act, disputes may have arisen with respect to mortgaged properties. Proceedings may have been initiated thereafter under Section 13 of the Securitisation Act. Would it be a tenable argument in the Civil Court that by virtue of the initiation of proceedings under Section 13, the Civil Court now loses jurisdiction and the party concerned would have to approach the DRT? If the Supreme Court’s dictum is to be given full meaning, then once proceedings are initiated under Section 13, the Civil Court should cease exercising jurisdiction and the plaintiff would have to approach the DRT under Section 17.

In addition, if a partition suit is pending in respect of various properties, and if one of the properties is mortgaged, would it be a tenable defence to urge that the Civil Court has no jurisdiction in respect of that one property which is mortgaged and in respect of which the DRT will determine the rights of the parties while the Civil Court will decide the rights of the parties with respect to all other properties?

This dichotomy needs to be prevented at all costs.

There is no real conflict in the determination that is done by the DRT and that which may be required by the Civil Court. The proper course in cases where proceedings are pending or are initiated before the Civil Court before/after initiation of proceedings under Section 13 would be as follows:

a. If the DRT or the DRAT cannot find fault with the proceedings initiated by a bank or financial institution under the Securitisation Act, then the proper course is to allow the bank or financial institution to proceed in terms of the Securitisation Act. Even where an objection is raised by a third party, if such objection goes to title, but the action taken is in accordance with the Securitisation Act, the issue of title would have to be resolved by a Civil Court whilst the DRT does not interfere with the action so taken by the Bank.

b. If the Bank seeks to auction mortgaged property where there are disputes on title, it would be subject to appropriate orders on title being passed by the Civil Court of competent jurisdiction, even where there is no violation of the provisions of the Securitisation Act and Rules.

It needs to be noticed that a mortgage is created in terms of the Transfer of Property Act and not in terms of the Securitisation Act. Whilst the question of whether a valid mortgage exists would be a question to be determined by the DRT, being ancillary to the power exercised under Section 13 of the Securitisation Act, the DRT cannot go further to determine questions of title. All those issues would necessarily have to be answered in an appropriate civil proceeding for title.

Such a course does not impinge on the power of the Bank acting under Section 13 of the Act to deal with mortgaged property. If a Bank has accepted property with defective title, then the consequence necessarily must follow and the DRT cannot resolve the complications arising out of such defective title. Unless the Securitisation Act is amended to permit the DRT to answer all those questions, to bar the jurisdiction of the Civil Court on a reading of Section 34 is incorrect.

The dictum of the Supreme Court and in particular in the Allwyn Alloys case being a judgment by a bench of three Judges will create confusion both to cases pending in Civil Courts which involve mortgaged properties as well as cases which may be initiated consequent to proceedings initiated under Section 13 of the Securitisation Act and does require re-examination.

The author is a Senior Advocate of the Karnataka High Court.

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