The primary function of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) is to ensure that banks and financial institutions have an adequate remedy to invoke their rights in assets as vested on account of the loan documents/credit facilities provided to debtors. It is evident that the charge/right in such assets, which fall within the purview of the loan documents/credit facilities, can be invoked by the banks and financial institutions in case of default on payment towards the loan account/credit facility extended to the debtors. However, in case where a possession of a property is attempted when such property is not a secured asset under the guise of the SARFAESI Act,such action can be question before a civil court.

In the case of Mrs. Elsamma and Ors v. Kaduthuruthy Urban Co-Op Bank Ltd and Ors,the Kerala High Court bench of Justice V Chitambaresh and Justice Narayana Pisharadi observed that

“Attempting to take possession of a property which is not a secured asset under the guise of the SARFAESI Act is certainly a fraudulent action which can be called in question in a civil court….”

The Appellant had filed a suit for a decree of permanent and prohibitory injunction restraining the Respondent Bank from trespassing or otherwise taking possession of the appellant’s property which did not fall within the purview of secured asset under SARFAESI Act. It was pled that the Respondent Bank was attempting to take possession of the unsecured asset as there has been no security interest created in favour of the Respondent Bank for such unsecured asset. The trial court held that the suit is not maintainable in view of Section 34 of the SARFAESI Act and furthermore, the first appellate court concurred with the view of the trial court and accordingly dismissed their appeal.  Hence the Appellant filed the said second appeal before the Kerala High Court.

The Appellants made reference to the judgment in KHDFC Bank Ltd. and others v. Prestige

Educational Trust [ILR 2015 (4) Kerala 938] stating that the bar under Section 34 of the SARFAESI Act does not apply to them. On the other hand, the Respondent Bank relied on the judgment in Jagdish Singh v. Heeralal and others [AIR 2014 SC 371]. The present second appeal was made on reference by a single bench for seeking correctness of the decision in KHDFC Bank Ltd. and others v. Prestige Educational Trust as to whether the same would have preference over the Supreme Court Judgment in Jagdish Singh v. Heeralal and others.

The Bench made the following observation in favour of the appellants as follows:

“The bar of jurisdiction of civil court is obviously in relation to a matter which the Debts Recovery Tribunal can determine in respect of any action taken under the SARFAESI Act. The jurisdiction is abundant in the civil court to entertain any suit or proceeding in respect of matters falling outside the scope of Section 13(4)of the SARFAESI Act. True it is that the remedies available to an aggrieved person under the SARFAESI Act are efficacious as held in Union Bank of India v.Satyawati Tondon and others [(2010) 8 SCC 110]. But a person cannot be pinned down to the remedies under the SARFAESI Act when he asserts in a civil suit that the property is not a secured asset. It may perhaps be open to any person aggrieved to move the Debts Recovery Tribunal to clarify that the measures taken are not in respect of the secured asset.”

Answering the reference made to it by the single judge bench, the Division Bench presiding over this appeal answered as follows:

(i) The jurisdiction of the civil court is not barred if the plea is that the plaint schedule property is not the secured asset in respect of which a security interest is created.

(ii) The civil court shall decline jurisdiction if it is found in the midst of adjudication that the disputed property is in fact the secured asset over which security interest is created.

(iii)Any person aggrieved can also move the Debts Recovery Tribunal under Section 17 seeking clarification about the measures taken under Section 13(4) of the SARFAESI Act .

(iv) The decision in KHDFC Bank Ltd.’s case (supra) is approved and does not militate against Jagdish Singh’s case (supra) wherein the property is admittedly a secured asset.

Image Link: