State Bank of India Vs. ITMA Hotels India Pvt. Ltd. - that pendency of actions under the SARFAESI Act or actions under RDB Act does not create obstruction for filing an application under IBC.

NCLT Kochi (31.12.2021) in State Bank of India Vs. ITMA Hotels India Pvt. Ltd.  [CP(IB)/30/ KOB/ 2021] held that;- 

• that pendency of actions under the SARFAESI Act or actions under RDB Act does not create obstruction for filing an application under IBC on the ground that provisions under IBC shall have overriding effect over any provisions inconsistent therewith contained in any other law for the time being in force.

 

Excerpts of the order;

This CP(IB)/30/KOB/2021 has been filed on 06.09.2021 by the State Bank of India, Stressed Assets Management Branch (SAMB), 1112, Raja Plaza, Avinashi Road, Coimbatore- 641 037. (‘Financial Creditor) by invoking the provisions of Section 7(4) of the Insolvency and Bankruptcy Code (hereinafter called as Code) against M/s ITMA Hotels India Private Limited,  ITMA Hotels, Ponnurunni North, Vytilla P.O., Kochi, Kerala 682 019. (‘Corporate Debtor’) stating that there is a total amount of Rs. 102,77,00,000/- (Rupees One Hundred and Two Crore and Seventy-Seven Lakhs Only) due from the Corporate Debtor to Financial Creditor and that the date of default is 25.09.2019.

 

The brief facts of the case are as under: - 

# 2. The State Bank of Travancore (SBT) and State Bank of Bikaner and Jaipur (SBBJ) granted term loan facilities of total Rs. 38 Core to the Corporate Debtor for construction of hotel vide sanction letters dated 20.09.2010 and 01.11.2010 respectively. A further Rs. 36 Crore was sanctioned on 09.02.2012 by SBT and 09.08.2012 by SBBJ. The sanction was renewed further on 26.09.2013 by SBI and SBBJ and a facility agreement was entered on 03.07.2014 for a total term loan facility of Rs. 95.77 Crore and working capital facility of Rs.7 Crore. The loan amount was disbursed against sanction of each facility. SBT and SBBJ got merged with State Bank of India on 31.03.2017 and the accounts are now maintained at the State Bank of India.

 

# 3. It is stated that Corporate Debtor has defaulted in the repayment of credit facilities and the accounts of SBT became NPA on 05.10.2015 and SBBJ on 06.11.2015. The Financial Creditor has filed OA 443 of 2016 before the Debts Recovery Tribunal (DRT) on 27.06.2016 for recovery of the due amount of Rs.113.20 Crore. Subsequently the Corporate Debtor vide letter dated 26.02.2019 requested the Financial Creditor for compromise  settlement, which was approved by the Applicant on 21.03.2019 by which the Corporate Debtor has agreed to settle the entire dues of Rs. 77 Crore and 100% cash margin for existing Bank Guarantee for Rs.5.03 crore in addition to Rs. 77 Crores, which was duly acknowledged by the Corporate Debtor on 28.03.2019. On the basis of the compromise settlement jointly agreed between the Corporate Debtor and Financial Creditor, the Debts Recovery Tribunal (DRT) passed a compromise settlement order on 20.09.2019 in OA No.443/2016, by which Corporate Debtor was directed to deposit Rs.12 Crores upfront, Rs.28 Crore on or before 31.03.2019 and balance Rs.37 Crore and cash margin to be paid on or before 25.09.2019. In the compromise, it is stated that if the payments are not effected within the stipulated time, the compromise offer would stand cancelled and Corporate Debtor shall be liable for the entire amount due as per the OA forthwith.

 

# 4. It is further stated that the Corporate Debtor has remitted Rs.12 Crore upfront as part and failed to make the balance payments within the stipulated time of 25.09.2019. The Corporate Debtor made a further payment of Rs.5 Crore and accordingly, a further extension was granted vide letter dated 27.12.2019. It is stated that the Corporate Debtor was required to make payment of Rs.10 Crore before 10.01.2020, Rs.20 Crore before 31.01.2020, Rs. 15 Crore before 28.02.2020 and balance Rs.15 Crore on or before 31.03.2020. Despite granting sufficient time, Corporate Debtor failed to make the balance payment in terms of compromise agreement. Hence, the present application has been filed by the Financial Creditor to initiate Corporate Insolvency Resolution Process against the Corporate Debtor under Section 7(4) of Insolvency and Bankruptcy Code, 2016. Submission by the Corporate Debtor

 

# 7. The Corporate Debtor filed a counter stating that they have paid initial instalment, but due to COVID pandemic, it could not complete its obligations under the Joint Compromise Statement. The Corporate Debtor has expressed his willingness to proceed with the Compromise Memo and according to them there is no default on the side of the Corporate Debtor.

 

# 8. They have raised the issue of limitation, as the account of the Corporate Debtor in SBT and SBBJ were declared NPA on 05.10.2015 and 06.11.2015 respectively and this application has been filed on 06.09.2021, not within three years from that dates.

 

# 9. It is also stated that the Adjudicating Authority under the IBC is not a substitute forum for collection of debt in the sense it cannot reopen debts which are barred by law, or debts, recovery whereof have become time barred. It is also stated that this Tribunal is not a forum for recovery of debt. Time and again, the appellate forum as well as the Apex Court has reiterated that the provisions of the IBC could not be invoked for recovery of outstanding dues, but could only be invoked to initiate CIRP for just reasons. It is also stated that the Corporate Debtor has not acknowledged its liability to the  Consortium of banks now held by the Financial Creditor within a period of three years prior to the date of filing of the application under Section 7 of the Code.

 

# 10. It is also their contention that the application moved by the Corporate Debtor for One Time Settlement or Restructuring cannot be taken as an acknowledgment of Debt. If the proceedings before the Debts Recovery Tribunal under Section 19(1) of the Recovery of Debts due to Banks & Financial Institutions Act of 1993, OA 443/20116 could be taken as proof of acknowledgement to satisfy the requirements under Section 18 of the Limitation Act, then the acknowledgment is only towards the One Time Settlement Amount and not to the amount of Rs. 197 crore as cited by the Financial Creditor in the Section 7 Application. It is further stated that the Corporate Debtor is liable to pay only the balance amount as agreed in the compromise agreement.

 

# 11. It is stated that even after the compromise agreement and Final Order inOA, there are further records to show that the Corporate Debtor has made payments and thus there is no default leading to proceedings under Section 7 of IBC.

 

FINDINGS

# 12. We have heard the learned counsel for the parties and perused the case records including documents appended with the case records. On perusal of the documents and hearing the arguments advanced by both the sides, this Bench finds it necessary to deal with each issue separately.

• i. Whether the application is maintainable?

• ii. Whether this application will come in the purview of multiple proceedings with respect to the same debt?

• iii. Whether there is a Creditor-Debtor relationship between the Financial Creditor and Corporate Debtor herein and whether this Tribunal can initiate CIRP against the Corporate Debtor?

 

# 13. Point No (i): We have gone through Part IV of the application; wherein it is clearly stated that the loan accounts of the Corporate Debtor in SBT became NPA on 05.10.2015 and SBBJ on 06.11.2015. The date of occurrence of default for the purpose of IBC is stated to be 25.09.2019. It is also seen from the records that the Corporate Debtor made a payment of Rs. 12 Crores on 27.03.2019 and Rs. 5 Crores on 31.12.2019. Section 238A of the IBC, 2016 defines “limitation” which is as under:

 

Section 238A: Limitation.

• 238A. The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debts Recovery Tribunal or the Debts Recovery Appellate Tribunal, as the case may be.

 

# 14. To get further clarity on this issue, we have gone through the Article 37 of the Limitation Act, 1963 which reads as under:

PART II—OTHER APPLICATION

137.

Any other application for which no period of limitation is provided elsewhere in this Division.

Three years

When the right to apply accrues.

 

# 15. It is settled law as decided by the Hon’ble NCLAT in its order in Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd. (Company Appeal (AT) (Insolvency) No. 44 of 2017) that those provisions of the IBC cannot be shackled by the Limitation Act. It is observed that: 

• “There is nothing on the record that Limitation Act, 2013 is applicable to I&B Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of I&B Code to suggest that the Law of Limitation Act, 1963 is applicable. The I&B Code, 2016 is not an Act for recovery of money claim, it relates to the initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having a continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.”

 

# 16. We therefore, are not agreeable with the submissions made by the Corporate Debtor regarding limitation for filing this application. Hence the application is maintainable.

 

# 17. Point No. (ii). On perusal of the records, we found out that Section 7 of the Code propounds the manner in which Corporate Insolvency Resolution Process (CIRP) is to be initiated by the “financial creditor” against a “corporate person being the corporate debtor”.

 

# 18. The Hon'ble National Company Law Appellant Tribunal ("NCLAT") in various judgments has held that pendency of actions under the SARFAESI Act or actions under RDB Act does not create obstruction for filing an application under IBC on the ground that provisions under IBC shall have overriding effect over any provisions inconsistent therewith contained in any other law for the time being in force.

 

# 19. In this connection the decision of the Hon’ble NCLAT in Rakesh Kumar Gupta v. Mahesh Bansal & Ors., (Company Appeal (AT) (Insolvency) No. 1408 of 2019) order dated on 20.02.2020, may be referred to.

 

# 20. Further on 26.02.2020, in the matter of Punjab National Bank v. M/s Vindhya Cereals Pvt. Ltd., (Company Appeal (AT) (Insolvency) No. 854 of 2019) the question that arose before the Hon'ble NCLAT was whether subsequent to initiation of proceedings under the SARFAESI Act, a financial creditor can be precluded from filing an application under Section 7 of the Code. The Hon'ble NCLAT held that simply because the Financial Creditor had initiated a parallel proceeding against a Corporate Debtor under SARFAESI Act as well as under the Code, it cannot be called malicious. The Hon’ble NCLAT further opined that Section 238 of Code provides that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Therefore, this non obstante clause of the Code will prevail over any other law for the time being in force. Hence, the contention regarding maintainability will not stand for scrutiny and is to be rejected.

 

# 21. Point No. (iii) From the records produced, we could find that there is a Creditor- Debtor relationship between the Financial Creditor and the Corporate Debtor, since the Corporate Debtor admitted that they received money from the Financial Creditor through various documents produced before this Tribunal and the Corporate Debtor has no case that they have fully repaid the money received from the Financial Creditor.

 

# 22. As there is a default in the payment of the financial debt, which has been confirmed by them in the counter affidavit that the Financial Creditor paid the money to the Corporate Debtor, this Tribunal is of the view that, the present application filed by the Financial Creditor satisfies all the definitions of “Financial Creditor”, “Default” and “Financial Debt” and qualifies for filing an application under the Insolvency and Bankruptcy Code. By mentioning various technical snags the Corporate Debtor cannot wash its hands in repaying the amount borrowed, which is a financial debt owed by them. Hence, there is a Creditor-Debtor relationship with them.

 

# 23. The Corporate Debtor committed default in repayment of the loan amount to the Financial Creditor, and hence its Loan Account was declared as NPA. In the light of above facts and circumstances, the existence of debt and default is reasonably established by the Financial Creditor as a major constituent for admission of an application under Section 7(4) of the I&B Code.

 

# 24. Therefore, we are of the considered view that the application filed in the capacity as a ‘Financial Creditor’ for a ‘financial debt’ which is recoverable from the Corporate Debtor viz., M/s ITMA Hotels India Private Limited is a fit case for admission and initiation of CIRP against the Corporate Debtor. The documents produced on record prove the disbursement of various loan facilities by the Financial Creditor to the Corporate Debtor.

 

# 25. The Application under Sub-Section (4) of Section 7 of I&B Code, 2016 is complete in all respects. Accordingly, the application for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor deserves to be admitted. Hence, the Application No. CP(IB)/30/KOB/2021 is admitted and the following order has been passed: -

 

ORDER

i. Having admitted the Application, the provisions of moratorium as prescribed under Section 14 of the Code shall be operative henceforth with effect from the date of order shall be applicable by prohibiting institution of any suit before a Court of Law, transferring/encumbering any of the assets of the Debtor etc.

 

ii. The Financial Creditor has suggested the name of Shri. Kizhakkekara Kuriakose Jose, an Insolvency Professional for appointment as Interim Resolution Professional (IRP). Accordingly, this Tribunal appoints Shri. Kizhakkekara Kuriakose Jose having Registration No. IBBI/IPA-001/IPP00445/2017-2018/10788, residing at KK Jose & Associates, Yenvee Complex, Temple Road, Aluva, Kerala683 101, email id:- kkjoseca@gmail.com whose name appears in the panel of IPs for appointment as Interim Resolution Professional for the period 01.07.2021 to 31.12.2021 for Kochi Bench, as the Interim Resolution Professional to carry out the functions as mentioned under IBC.

 

iii. The fee payable to IRP or as the case may be to RP shall comply with such regulation/circular and direction as may be issued by the IBBI and the IRP shall carry out his duties as contemplated by Section 15, 17, 18, 19, 20 and 21 of the IBC.

 

iv. The Financial Creditor shall deposit an amount of Rs. 2,00,000/- (Rs. Two Lakhs Only) with the IRP to meet the initial expenses towards issue of public notice and inviting claims etc. These expenses are subject to approval by the Committee of Creditors (CoC).

 

v. The supply of essential services to the “Corporate Debtor” shall not be terminated during Moratorium period. It shall be effective till completion of the Insolvency Resolution Process or until the approval of the Resolution Plan prescribed under Section 31 of the Code, by the Adjudicating Authority.

 

vi. That as prescribed under Section 13 of the Code on declaration of moratorium the next step of Public Announcement of the Initiation of Corporate Insolvency Resolution Process shall be carried out by the IRP immediately on receipt of this order, as per the provisions of the Code.

 

vii. That the Interim Resolution Professional shall perform the duties as assigned under Section 15 and Section 18 of the Code and inform the progress of the C.I.R.P. and the compliance of the directions of this Order within 30 days to this Bench. Liberty is granted to intimate even at an early date, if need be.

 

viii. The commencement of the Corporate Insolvency Resolution Process shall be effective from the date of the Order of Admission. 

 

ix. During the CIRP period, the management of the Corporate Debtor shall vest in the IRP/RP in terms of Section 17 of the IBC. The Directors/Officers and Managers of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP within a period of one week from the date of receipt of this Order, in default coercive steps will follow.

 

x. The Registry is directed to communicate this order to the Financial Creditor, the Corporate Debtor and the IRP by Speed Post and email within two days from the date of this Order.

 

xi. A copy of this Order be also sent to the Registrar of Companies, Kerala, for updating the Master Data of the Corporate Debtor, who shall send a compliance report in this regard to the Registry of this Tribunal within seven days.

 

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Blogger’s comments; An interesting order. The clock in respect of applicability of limitation for section 7 & 9 applications has been set back by the said order, observing;

 

# 13. Point No (i): We have gone through Part IV of the application; wherein it is clearly stated that the loan accounts of the Corporate Debtor in SBT became NPA on 05.10.2015 and SBBJ on 06.11.2015. The date of occurrence of default for the purpose of IBC is stated to be 25.09.2019. It is also seen from the records that the Corporate Debtor made a payment of Rs. 12 Crores on 27.03.2019 and Rs. 5 Crores on 31.12.2019. . . 

 

# 15. It is settled law as decided by the Hon’ble NCLAT in its order in Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd. (Company Appeal (AT) (Insolvency) No. 44 of 2017) that those provisions of the IBC cannot be shackled by the Limitation Act. It is observed that: 

• “There is nothing on the record that Limitation Act, 2013 is applicable to I&B Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of I&B Code to suggest that the Law of Limitation Act, 1963 is applicable. The I&B Code, 2016 is not an Act for recovery of money claim, it relates to the initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having a continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.”

 

# 16. We therefore, are not agreeable with the submissions made by the Corporate Debtor regarding limitation for filing this application. Hence the application is maintainable.

 

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Tajunissa & Anr. Vs. Vishal Sharma & Ors - 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.

HC Delhi (04.01.2022) in Tajunissa & Anr. Vs. Vishal Sharma & Ors. [CS(OS) 262/2019 & I.A. 7168/ 2019] held that;

• To the statutory proscription engrafted in Section 34 of the SARFAESI Act, therefore, the Supreme Court has, in the afore extracted passage from Mardia Chemicals, chiselled 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”.

• The words used by the Supreme Court indicate 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.

• 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.

• “Fraud in the contemplation of a civil court of justice, may be said to include properly all acts, omissions and concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed and are injurious to another, or by which an undue or an unconscientious advantage is taken of another.”

• “ ‘Collusion’ means a secret agreement for a fraudulent purpose or a secret or dishonest arrangement in fraud of the rights of another. It is a deceitful arrangement between two or more persons for some evil purpose, such as to defraud a third person of his rights.”

 

Excerpts of the order;

# 1. Mr. Ravi Gupta, learned Senior Counsel for Defendant 3, the Kotak Mahindra Bank (“the Bank”, hereinafter) vehemently opposed the issuance of summons in this suit and submitted that, even without any pleadings being invited by the Court or being placed on record by his client, he desired to advance submissions, orally, as would persuade this Court to dismiss the suit in limine in exercise of the jurisdiction vested in it by Order VII Rule 11 of the Code of Civil Procedure, 1908 (“the CPC”).

 

# 2. No application under Order VII Rule 11 has been moved by the defendant. No pleadings by the defendant are on record. As Mr. Gupta has chosen to argue sans any pleadings, the submissions in the plaint have, for the purposes of this application, to be treated as admitted, at least for the present and for the purpose of consideration of the objections raised by Mr. Gupta. The Court, therefore, proceeds on demurrer.

 

# 3. On the principles of law, on which he seeks to base his oral prayer for dismissal of the suit without issuance of summons, Mr. Gupta has placed on record written submissions, along with copies of judgments on which he seeks to place reliance. Mr. Anupam Lal Das, learned Senior Counsel for the plaintiffs, has done likewise.

 

# 4. Learned Senior Counsel have been heard at exhaustive length.

 

# 5. Mr. Das had initially objected to grant of an audience to Mr. Gupta at this stage, contending that summons had, of necessity, to be issued in any suit validly instituted and that the right of the defendant to an audience would enure only by way of response to the summons. Any objection to the maintainability of the suit, Mr. Das had sought to submit, would have, at that stage, to be raised by the defendant by moving an appropriate application under Order VII Rule 11 of the CPC. Mr. Das had sought to contend that the defendant could not seek to stymie the very issuance of summons, to which every suit, validly instituted, was entitled. He had placed reliance, in this context, on the decision of a Division Bench of this Court in Bright Enterprises Pvt Ltd v. MJ Bizcraft LLP.

 

# 6. I had, vide my order dated 23rd July, 2021, rejected the submission of Mr. Das, relying on Bright Enterprises itself which, in paras 18 and 19, allowed the suit to be disposed of, without issuance of summons, where a successful challenge to the maintainability of the suit was raised under Order VII Rule 10 or under Order VII Rule 11 of the CPC. Success of a challenge laid under the former provision would result in return of the suit, to be instituted before a proper forum, whereas success of a challenge laid under the latter would result in rejection of the suit outright. Bright Enterprises, I observed, allowed the suit to be brought to an end in limine without issuance of summons in these two select instances; in all other cases, as Mr. Das contended, issuance of summons was a matter of right. As the court to decline to issue summons on the suit, were a case under Order VII Rule 10 or Order VII Rule 11 to be successfully made out, the defendant could not be denied an opportunity of an audience in that regard. The objection of Mr. Das, to the Court entertaining Mr. Gupta at this stage, even before summons were issued in the suit was, therefore, rejected.

 

# 7. In choosing, however, to oppose issuance of summons in the suit even without placing pleadings on record, Mr. Gupta has allowed the averments in the suit to, for the purposes of consideration of his challenge, be regarded as correct on the principle of demurrer and has, thereby, taken a calculated risk. As the discussion hereinafter would reveal, this risk has not, in the present case, paid off.

 

# 8. Before appreciating the challenge laid by Mr. Gupta to the issuance of summons in the suit, a brief understanding of the case set up by the plaintiffs, in the suit, as pleaded, is necessary.

 

9. Case set up by the plaintiffs in the suit

9.1 Plaintiff 2 is the daughter of Plaintiff 1. The plaintiffs, between themselves, own the basement, ground floor, first floor, and third floor along with terrace rights of the suit property. Defendant 2 is a Company, of which Defendant 1 is the Director.

 

9.2 By a lease deed dated 24th July, 2015, Plaintiff 1 leased the basement of the suit property to Defendant 2, through Defendant 1. The plaintiffs alleges that, thereafter, Defendant 1 misled the plaintiffs into believing that he was financially secure and that the affairs of Defendant 2 were sound and, thereby, coaxed the plaintiffs into reposing trust in him. Misusing the trust thus reposed by the plaintiffs, the plaint alleges that Defendant 1 convinced the plaintiffs to part with possession of the title deeds of the suit property and to sign certain documents, the contents of which were not disclosed to the plaintiffs, and of which they remained unaware, though they were informed that the documents would be needed to secure a loan from the Bank (Defendant 3). Defendant 1, it is alleged, fraudulently used the documents signed by the plaintiffs, and the title deeds of the suit property handed over by the plaintiffs, to mortgage the suit property with the Bank (Defendant 3), on the basis of which loan was availed by Defendant 2. Against the advancing of loan to Defendant 2, the

plaintiffs (through the documents allegedly surreptitiously got signed from them by Defendant 1), Defendant 1 and certain other entities stood guarantors.

 

9.2 Defendant 2 subsequently went into liquidation. The loan advanced to Defendant 2 went into default, and the account of Defendant 2 became a Non-Performing Asset (NPA), resulting in the Bank proceeding against Defendant 2, the guarantors (including the plaintiffs) as well as the mortgaged suit property, by instituting proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT). The NCLT initiated a Corporate Insolvency Resolution Process (CIRP) against Defendant 2.

 

9.3 Thereafter, the Bank proceeded against the plaintiffs and the defendants under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“the SARFAESI Act”). The outstanding unpaid loan amount was ₹ 25,51,09,036.77. Statutory Demand Notice, under Section 13(2) of the SARFAESI Act was issued by the Bank to the plaintiffs and Defendant 1 on 13th August, 2019. On the plaintiffs and Defendant 1 failing to respond within the period stipulated under Section 13 of the SARFAESI Act3, the Bank, on 24th and 27th November, 2020, proceeded to take possession of the mortgaged suit property, under Section 13(4).

 

9.4 Subsequently, on 27th November, 2020, the Bank also filed an Original Application before the learned Debt Recovery Tribunal (DRT) under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“the 1993 Act”). 

 

# 10. According to the plaintiffs, Defendant 1 informed the plaintiffs of the documents, signed by the plaintiffs, and the title deeds of the suit property, handed over by the plaintiffs to Defendant 1, having been used by him to obtain a loan from the Bank by mortgaging the suit property, only in 2019. The plaintiffs, in the circumstances, filed a Police Complaint, and also addressed a letter to the Chief Manager of the Bank. Averments to this effect are contained in paras 26 and 27 of the plaint, which read thus:

• “26. In view of this act of blatant fraud played upon them by the Defendant No. 1, the Plaintiffs filed a Police Complaint which PS Safdarjung Enclave on 19.12.2018 vide DD No.39B. A copy of the Police Complaint is filed along with the present Suit.

• 27. In addition to the said Police Complaint, the Plaintiffs also wrote a detailed letter to the Chief Manager of Defendant No. 3 stating inter alia that they had been defrauded by the Defendant No. 1 with the collusion of some Bank officials of Defendant No. 3. A Copy of the Letter dated 23.1.2019 is filed along with the present Suit.” (Emphasis supplied)

 

# 11. The “Subject” in the Police Complaint lodged by the plaintiffs on 19th December, 2018, reads “Complaint against Accused Persons, namely (1) Mr. Vinay Vishal Sharma, Director of M/s Affinity Beauty Salon Pvt Ltd, (2) M/s. Affinity Beauty Salon Pvt Ltd, a Company having registered office at C-25 Green Park Ext. New Delhi, 110016, and other unknown accused persons in the employment of Kotak Mahindra Bank Ltd, Nehru Place Branch for committing the offences of conspiracy, cheating and breach of trust punishable under Sections 420/406/120B of the Indian Penal Code, 1860”. Para 9 of the Police Complaint specifically alleges that Plaintiff 2 was made to sign papers, without disclosing their parentage, by Defendant 1 “along with a couple of representatives stating to be from the Bank”. The concluding para 18 of the Complaint also alleges, specifically, that the plaintiffs had “been cheated out of their property by the Accused Persons and the other unknown Bank Officials who are hand in glove with the Accused Persons”.

 

# 12. The attempts of the Bank to proceed against the suit property, it is claimed, fuelled the filing of the present plaint. Essentially predicated on the above allegations, the plaintiffs seek, in the suit, 

• (i) declaration that the documents executed by the plaintiffs in favour of the Bank are null and void, 

• (ii) cancellation of the mortgage of the suit property, 

• (iii) a direction to the Bank to return the title deeds of the suit property and 

• (iv) a restraint against the Bank from interfering with the plaintiffs’ possession of the suit property. Rival Contentions

 

# 13. Mr. Gupta’s contention is that the suit is barred by Section 34 of the SARFAESI Act, which reads thus:

• “34. Civil Court not to have jurisdiction. – 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 (51 of 1993).” 

 

Section 34, in the submission of Mr. Ravi Gupta, embodies a clear proscription against entertainment, and, consequently, issuance of summons, in a case such as this. He relies, for this purpose, on the judgment of the Supreme Court in Mardia Chemicals Ltd v. U.O.I.4 A suit would lie, in his submission, only where the plaintiffs allege fraud against the Bank. No such allegation – as Mr. Gupta would submit – is contained in the plaint and, accordingly, the suit is not maintainable. This submission has also been reduced into writing, in the following passage, contained in written submissions filed by the Bank under an index dated 3rd May, 2021:

• “That in case of Mardia Chemicals Ltd. vs. Union of India (AIR 2004 SC 2371) the Hon’ble Apex Court while holding the validity of SARFAESI Act held that the jurisdiction of the Civil court can be invoked only to a very limited extent where the action of the secured creditor is alleged to be fraudulent or their claim may be so absurd and untenable which may not require any probe whatsoever. It is submitted that in the present case the Plaintiffs have alleged the plea of fraud against the other Directors/Guarantors of Principal borrower being Defendant No. 2 and no allegations have been made against the Defendant No. 3 Bank, therefore, the exception which has been mentioned in the judgement passed by the Hon’ble Supreme Court does not apply in the present case and the present suit is liable to be dismissed.” (Emphasis supplied)

 

In a similar vein, it is contended, in the written submissions tendered by the Bank on 7th December, 2021, after orders were reserved, that “there is no plea of fraud much less legal and valid plea of fraud against the Defendant No. 3 Bank, as has been raised in the plaint”.

 

# 14. Where the secured creditor has initiated proceedings under Section 13 of the SARFAESI Act, resort to the civil court, submits Mr. Gupta, stands completely foreclosed by virtue of Section 34 thereof, except where fraud is pleaded against the secured creditor. In the present case, Mr. Gupta submits that the plaintiffs have pleaded fraud only against Defendants 1 and 2 and not against the Defendant 3-Bank. The suit is, therefore, not maintainable.

 

Discussion and Findings

# 15. No detailed analysis is, in my opinion, necessary, as the submission of Mr. Gupta is obviously contrary to the record, as well as the pleadings in the plaint.

 

# 16. The position in law, as Mr Gupta correctly submits, stands settled by the decision in Mardia Chemicals.

 

# 17. Mardia Chemicals 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.

 

# 18. The Supreme Court negatived the challenge. For the purposes of the present dispute, it is not necessary to enter further into that aspect.

 

# 19. One of the issues which was discussed in the judgment, and with which alone we are concerned in the present case, was whether the borrower could seek recourse to a civil court, once Section 13 was invoked by the secured creditor. Inter alia, it was sought to be contended before the Supreme Court that, perhaps, recourse to the civil court was permissible before the secured creditor took possession of the properties of the borrowers/guarantors under Section 13(4), but not after action under Section 13(4) had been taken. The Supreme Court, however, negatived the contention, holding that, 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. Mr. Gupta places especial reliance on the observations of the Supreme Court in that regard, which are to be found in para 50 of the report:

• “50. It has also been submitted that an appeal is entertainable before the Debts Recovery Tribunal only after such measures as provided in sub-section (4) of Section 13 are taken and Section 34 bars to entertain any proceeding in respect of a matter which the Debts Recovery Tribunal or the Appellate Tribunal is empowered to determine. Thus before any action or measure is taken under sub-section (4) of Section 13, it is submitted by Mr Salve, one of the counsel for the respondents that there would be no bar to approach the civil court. Therefore, it cannot be said that no remedy is available to the borrowers. We, however, find that this contention as advanced by Shri Salve is not correct. A full reading of Section 34 shows that the jurisdiction of the civil court is barred in respect of matters which a Debts Recovery Tribunal or an Appellate Tribunal is empowered to determine in respect of any action taken “or to be taken in pursuance of any power conferred under this Act”. That is to say, the prohibition covers even matters which can be taken cognizance of by the Debts Recovery Tribunal though no measure in that direction has so far been taken under subsection (4) of Section 13. It is further to be noted that the bar of jurisdiction is in respect of a proceeding which matter may be taken to the Tribunal. Therefore, any matter in respect of which an action may be taken even later on, the civil court shall have no jurisdiction to entertain any proceeding thereof. The bar of civil court thus applies to all such matters which may be taken cognizance of by the Debts Recovery Tribunal, apart from those matters in which measures have already been taken under sub-section (4) of Section 13.”

 

# 20. Mr. Gupta also places reliance on the succeeding para 51 of the report which, however, completely defeats his case. The paragraph reads thus:

• “51. However, to a very limited extent jurisdiction of the civil court can also be invoked, where 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 or to say precisely to the extent the scope is permissible to bring an action in the civil court in the cases of English mortgages. We find such a scope having been recognized in the two decisions of the Madras High Court which have been relied upon heavily by the learned Attorney General as well appearing for the Union of India, namely, V. Narasimhachariar, AIR 1955 Mad 135, AIR at pp. 141 and 144, a judgment of the learned Single Judge where it is observed as follows in para 22 : (AIR p. 143)

• “22. The remedies of a mortgagor against the mortgagee who is acting in violation of the rights, duties and obligations are twofold in character. The mortgagor can come to the court before sale with an injunction for staying the sale if there are materials to show that the power of sale is being exercised in a fraudulent or improper manner contrary to the terms of the mortgage. But the pleadings in an action for restraining a sale by mortgagee must clearly disclose a fraud or irregularity on the basis of which relief is sought : Adams v. Scott [(1859) 7 WR 213, 249] . I need not point out that this restraint on the exercise of the power of sale will be exercised by courts only under the limited circumstances mentioned above because otherwise to grant such an injunction would be to cancel one of the clauses of the deed to which both the parties had agreed and annul one of the chief securities on which persons advancing moneys on mortgages rely. (See Ghose, Rashbehary : Law of Mortgages, Vol. II, 4th Edn., p. 784.)” (Emphasis supplied)

 

# 21. To the statutory proscription engrafted in Section 34 of the SARFAESI Act, therefore, the Supreme Court has, in the afore extracted passage from Mardia Chemicals, chiselled 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”.

 

# 22. The words used by the Supreme Court indicate 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.

 

# 23. 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.

 

# 24. The expression “fraud”, of which “fraudulent” is merely a derivative, is of wide amplitude, and one need search no farther, to appreciate its scope, than the following definition in Kerr on Fraud and Mistake, 78 Edition, cited with approval by the Supreme Court in Venture Global Engineering v. Satyam Computer Service Ltd: 

• “Fraud in the contemplation of a civil court of justice, may be said to include properly all acts, omissions and concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed and are injurious to another, or by which an undue or an unconscientious advantage is taken of another.”

 

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.

 

# 25. The plaintiffs have specifically alleged collusion against the officials of the Bank. Collusion, as a tort, partakes fundamentally of the character of fraud. The Supreme Court, in State of Goa v. Colfax Laboratories Ltd, defined “collusion” thus:

• “ ‘Collusion’ means a secret agreement for a fraudulent purpose or a secret or dishonest arrangement in fraud of the rights of another. It is a deceitful arrangement between two or more persons for some evil purpose, such as to defraud a third person of his rights.”   (Emphasis supplied)

 

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 Chemicals. 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.

 

# 26. Indeed, Mr. Ravi Gupta, quite fairly, did not seek to contend otherwise. As the paragraph extracted from the defendant in the written submissions, in para 13 supra reveals, the submission of Mr. Ravi Gupta has proceeded, all throughout, on the premise that the plaintiffs have not alleged fraud on the part of the Defendant 3-Bank. This, as it is clear, is not the case.

 

# 27. Fraud and collusion, on the part of the Bank have been specifically pleaded by the plaintiffs, I am unable to concur with Mr. Ravi Gupta that the plaintiff is disentitled to issuance of summons in the suit. Mardia Chemicals holds otherwise. 

 

# 28. The objection of Mr. Gupta is, therefore, rejected.

 

# 29. Orders in the suit and in the pending applications would be pronounced separately.

 

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