The Delhi High Court has held that the general bar to civil court proceedings in light of Section 34 of the SARFAESI Act after invoking of Section 13 is subject to the exceptions of fraud or absurd claims by the secured creditor.
The single-judge bench of Justice C. Hari Shankar referred to SC Judgement in Mardia Chemicals Ltd. Vs. U.O.I. & Ors, 2004 Latest Caselaw 234 SC ]which chiseled out the exception.
"the action of the secured creditor is alleged to be fraudulent or his claim may be so absurd and untenable which may not require any probe whatsoever”
The Court was dealing with a plea involving claims of collusion between the Bank and the Defendant to fraudulently execute a mortgage agreement on Plaintiff's property.
The Counsel for the Bank while opposing the issuance of summons, contended that since the Bank had invoked Section 13 (Enforcement of security interest) of the SARFAESI Act, the suit may be dismissed in limine in light of the bar on civil proceedings under Section 34.
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Section 34 provides that 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 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.
The Court noted at the outset that legal position stands settled by the decision in Mardia Chemicals Ltd. Vs. U.O.I. & Ors
"Mardia Chemicals4 involved a challenge, wholesale, to the SARFAESI Act, with particular emphasis on Section 13. It was sought to be contended, before the Supreme Court, that Section 13 of the SARFAESI Act allowed a secured creditor to proceed against the property of the borrower merely on the borrower defaulting in payment within the stipulated period, consequent on notice under Section 13(2) being issued by the secured creditor. The burden of the challengers’ song was that the statute did not provide for any dispassionate adjudicatory mechanism, which would factor in the concerns and interests of the borrower, and the legitimate defences that the borrower may have had against the claim of the creditor."
Whether the borrower could seek recourse to a civil court, once Section 13 was invoked by the secured creditor?
The Court in the ruling Mardia Chemicals Ltd. Vs. U.O.I. & Ors observed, once Section 13 stood invoked by the secured creditor, recourse to the civil court stood statutorily barred, even before the matter proceeded to the Section 13(4) stage.
However, to the statutory proscription engrafted in Section 34 of the SARFAESI Act, the Supreme Court, chiseled out an exception, in a case in which “for example, the action of the secured creditor is alleged to be fraudulent or his claim may be so absurd and untenable which may not require any probe whatsoever”.
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In view of the above, the Court opined that the exception to availability of the ordinary civil remedy, by the borrower, where the secured creditor has proceeded to take action under Section 13 of the SARFAESI Act, is not couched in exhaustive terms.
"The Supreme Court starts by using the expression “for example”. This, even by itself, indicates that the categories of cases envisaged in the succeeding part of the sentence merely exemplify those cases in which recourse to the civil court is permissible, and are not exhaustive in that regard."
The first category of such cases, as envisaged by the Supreme Court, is “where the action of the secured creditor is alleged to be fraudulent”. All that is required is, therefore, an allegation. Once there is, in the pleadings of the plaintiff before the civil court, an allegation that the act of the secured creditor is fraudulent, the proscription against recourse to the ordinary civil remedy, in Section 13, ceases to apply, the Court noted.
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The expression “fraud”, of which “fraudulent” is merely a derivative, is of wide amplitude, and one need search no farther, to appreciate its scope. The Court referred to Venture Global Engineering Vs. Satyam Computer Services Ltd & ANR., 2010 Latest Caselaw 565 SC
"That the duty of a Bank, to its customers and clients, involves, fundamentally, an element of trust and confidence, “justly reposed” by the client in the Bank and its employees, is merely stating the obvious. Where, therefore, the plaintiffs allege that the Bank has, in collusion with other defendants, used documents, got fraudulently executed or signed by the plaintiffs, to mortgage the plaintiffs’ property with the Bank, fraud, quite plainly, is alleged. The particular use of the word “fraud”, mantra-like, is hardly required, where the elements of fraud are pleaded, as in the present case."
The plaintiffs have specifically alleged collusion against the officials of the Bank. Collusion, as a tort, partakes fundamentally of the character of fraud, the Court remarked.
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Citing The State of Goa & ANR Vs. M/S. Colfax Laboratories Ltd. & ANR, 2003 Latest Caselaw 534 SC, the Court noted that Collusion, if alleged, therefore, partakes, in its essence, of the character of fraud. Particularly in the case of a Bank, which enjoys a fiduciary relationship with the public, an expansive interpretation to the expression “fraud” has to be accorded. Whether the allegation is right or wrong, substantial or merely chimerical, or merely a puff in the air, is not relevant while examining the applicability of para 51 of the report in Mardia Chemicals4 . Once the allegation exists, it exists, for better or for worse. Once fraud, on the part of the secured creditor, is alleged, recourse to ordinary civil remedies cannot be denied to the plaintiffs.
In view of the above, the Court noted that Fraud and collusion, on the part of the Bank have been specifically pleaded by the plaintiffs and is entitled to issuance of summons in the suit, thereof.
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