2022 (3) TMI 1614 - HC - Indian Laws

Bank can enforce security interest without civil suit restraint under SARFAESI Act Section 13

Mr. Venkateshwaran J. Tirunillai & Anr Versus Mr. Pradeep Mansukhani & Ors

The Bombay HC dismissed an appeal challenging a lower court's refusal to restrain secured creditors from enforcing security interest in disputed property. ... Declination to restrain Secured Creditors, from enforcing, security interest in the suit property - Order 43 Rule 1(r) read with 104 of the Civil Procedure Code, 1908 - whether, evidence on record, prima-facie, establishes ‘the fraud’ practiced by the defendant nos.1 and 2 and Bank on plaintiffs to extinguish their title over the Suit Property? - HELD THAT:- The termination of MOU by the defendant nos.1 and 2 was not dishonest commission or omission of act, as alleged by the plaintiffs. Likewise, since, plaintiffs also neglected the Bank’s offer of settlement, one cannot allege that the bank adopted the measures to enforce the security interest, in secret understanding with defendant nos.1 and 2 with an intention, to extinguish plaintiffs’ title over the Suit Property. In fact, the bank was not aware of the MOU executed between the plaintiffs and defendant no.1. As a consequence, for want of knowledge of the MOU, it is inconceivable, and improbable, to accept the plaintiffs’ case that the defendant nos.1 and 2 colluded with the bank officers and managed to purchase the suit property at undervalued price. Although in the plaint, plaintiffs alleged secret understanding between the officers of the bank and the defendant nos.1 and 2, the allegations require no consideration for two simple reasons; first, is that, bank was not aware of the MOU and second, the officers against whom allegations of collusion, have been made, are not parties to the suit. Additionally, the allegations of the ‘fraud’ are vague and no better particulars have been pleaded. The plaintiffs have not made out prima-facie case that defendant no.1, in secret understanding with the bank officers bye- passed plaintiff’s interest and purchased the suit property with an intention to extinguish their title over suit property. The material on record shows, that the defendant nos.1 and 2 have invoked the alternative dispute resolution mechanism and called upon the plaintiffs to accept the nomination of either persons to act as sole arbitrator. As such, if at all plaintiffs had suffered any losses for the alleged breach of MOU by the defendant nos.1 and 2, they may claim the appropriate relief before the arbitrator. In the circumstances, the fact remains, the security measures adopted by the bank under Section 13 of the SARFAESI Act cannot be faulted with nor it was open to plaintiffs to challenge in Civil Suit. The reason being, there is no material at all, on record even to, remotely suggest that the bank and its officers in secret understanding with the defendant no.1, sold the property at the undervalued price to overreach title of plaintiffs in the Suit Property. In fact, affidavit-in-reply of the State Bank of India signify, that the measures to enforce the security interest were taken by complying with the provisions of the Act. The impugned order requires no interference. It is dismissed - it is not a fit case to continue the interim relief. The request is rejected. Issues Involved:1. Jurisdiction of Civil Court under SARFAESI Act.2. Validity and enforceability of the Memorandum of Understanding (MOU) under SARFAESI Act.3. Allegations of fraud and collusion between defendants and bank officers.4. Measures taken by the bank under Section 13 of the SARFAESI Act.5. Remedies available to plaintiffs for alleged breach of MOU.Issue-wise Detailed Analysis:1. Jurisdiction of Civil Court under SARFAESI Act:The court referenced Section 13 of the SARFAESI Act, which allows enforcement of security interest without court intervention. It cited the Supreme Court's decision in *Jagdish Singh v. Hiralal* (2014) which held that grievances against measures taken under Section 13(4) should be addressed to the Debts Recovery Tribunal (DRT) and not civil courts. Consequently, the trial court declined to restrain secured creditors from enforcing security interest, and this decision was challenged under Order 43 Rule 1(r) read with 104 of the Civil Procedure Code, 1908.2. Validity and Enforceability of the Memorandum of Understanding (MOU) under SARFAESI Act:The plaintiffs executed an MOU with defendants on 11th February 2021, agreeing to sell the suit property. However, the court noted that this MOU was executed in defiance of Section 13(13) of the SARFAESI Act, which prohibits borrowers from transferring secured assets post-receipt of notice under Section 13(2) without the secured creditor's consent. The plaintiffs did not disclose the MOU to the bank, nor informed the defendants about the notice received under Section 13(2). The court concluded that the MOU was not enforceable.3. Allegations of Fraud and Collusion between Defendants and Bank Officers:The plaintiffs alleged that defendants colluded with bank officers to purchase the property at an undervalued rate, thus causing unlawful losses to the plaintiffs. The court found no prima facie evidence of fraud. It noted that the bank was unaware of the MOU and that the allegations of collusion were vague and lacked specific particulars. The court emphasized that the bank's measures to enforce security interest were taken in compliance with the SARFAESI Act.4. Measures Taken by the Bank under Section 13 of the SARFAESI Act:The court observed that the bank followed mandatory provisions and rules under the SARFAESI Act, including issuing a notice under Section 13(2) and conducting an e-auction through a government agency. The plaintiffs' account was categorized as a stressed asset, and despite several reminders, they failed to pay the dues. The bank published sale notices and conducted the auction transparently. The court found no fault in the bank's actions and stated that the measures taken were immune from challenge in a civil suit.5. Remedies Available to Plaintiffs for Alleged Breach of MOU:The court suggested that the plaintiffs' remedy for any alleged breach of the MOU by the defendants was to claim damages and pecuniary loss through arbitration, as the defendants had invoked the alternative dispute resolution mechanism. The court noted that the plaintiffs had also availed the remedy under Section 17 of the SARFAESI Act by filing an appeal before the DRT, which was pending.Conclusion:The court dismissed the plaintiffs' case, holding that there was no prima facie evidence of fraud or collusion. It affirmed that the bank's measures under the SARFAESI Act were lawful and could not be challenged in a civil suit. The court also rejected the request to continue interim relief.