Civil Suit Alleging Specific Loan Fraud Can Proceed Despite SARFAESI S.34 Bar, Especially if DRT Denied Plaintiff Locus: High Court - 2025-05-08

High Court Revives Civil Suit, Rules Specific Fraud Allegations Can Bypass SARFAESI Bar

Panaji, Goa – In a significant ruling, the High Court, presided over by Justice Bharat P.Deshpande , has quashed orders of lower courts that had rejected a commercial suit alleging fraud and collusion in the sanctioning of a bank loan. The Court held that a civil suit containing specific averments of fraud against a secured creditor (bank) and other parties is maintainable and not absolutely barred by Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, particularly when the Debts Recovery Tribunal (DRT) had earlier found the plaintiff to have no locus standi to challenge the bank's actions under the SARFAESI Act.

The writ petition challenged orders of the Commercial Appeal Court and the Commercial Court, which had dismissed the petitioner's suit at the threshold under Order 7 Rule 11 of the Civil Procedure Code (CPC).

Background of the Dispute

The petitioner, a director and shareholder holding 33.33% in M/s Super Electro Manganese Chemicals (Respondent No. 2), alleged that fellow directors (Respondent Nos. 3 and 4) mismanaged the company, siphoned funds, and, in collusion with Respondent No. 1 bank, fraudulently obtained a loan of Rs. 3.5 crores in October 2020. This loan was allegedly secured against company assets without proper board authorization or the petitioner's knowledge and consent, with the intent to shut down the company.

Previously, the National Company Law Tribunal (NCLT), Mumbai, in a petition filed by the petitioner, had found prima facie evidence of mismanagement by Respondent Nos. 3 and 4 and had appointed an Administrator for Respondent No. 2 company.

When the loan defaulted, the bank initiated SARFAESI proceedings. The petitioner's attempt to challenge these actions before the DRT Mumbai under Section 17(1) of the SARFAESI Act was rejected on the grounds that, as a mere shareholder, he lacked locus standi. Subsequently, the bank took forceful possession of the company's secured assets. The petitioner then filed a commercial suit seeking a declaration that the loan agreement and mortgage were fraudulent and void, which was rejected by the Commercial Court and the rejection was upheld by the First Appellate Court, citing the bar under Section 34 of the SARFAESI Act.

Arguments Presented

Petitioner's Counsel (Mr. S. S. Kantak , Senior Advocate): * The plaint contained specific allegations of fraud and collusion involving the bank, such as the loan being sanctioned before any board resolution authorizing it. * Citing Mardia Chemicals Ltd Vs Union of India , argued that civil courts have limited jurisdiction in cases of fraud by secured creditors. * Since the DRT found the petitioner had no locus standi under Section 17 of SARFAESI, the bar under Section 34 (which ousts civil court jurisdiction for matters DRT can determine) should not apply, as it would leave the petitioner remediless.

Respondents' Counsel (Mr. S. D. Lotlikar, Senior Counsel for the bank, and Mr. S. Desai for the purchaser): * The petitioner's remedy lay exclusively before the DRT. * As a shareholder, the petitioner had no locus standi to challenge the company's loan. * The suit was clearly barred by Section 34 of the SARFAESI Act. * Allegations of fraud were inter-se between the petitioner and other directors, not against the bank, and were merely "clever drafting" to bypass the statutory bar.

Court's Reasoning and Key Findings

Justice Deshpande , after a detailed examination of the plaint and relevant legal principles, found merit in the petitioner's arguments.

1. Specificity of Fraud Allegations: The Court emphasized that for deciding an application under Order 7 Rule 11 CPC, only the averments in the plaint and relied-upon documents are to be considered. The Court found that the lower courts had erred in concluding that there were no specific particulars of fraud.

"A meaningful reading of the plaint would clearly go to show that there are specific and sufficient averments with regard to fraud played by bank along with defendant nos. 3 and 4 against the petitioner/plaintiff and the purpose of it... Plaint does not contain mere words such as fraud/fraudulent etc but it specifically discloses the instances by which plaintiff is trying to demonstrate as to how such fraud and collusion exists." (Para 47) The Court noted specific instances pleaded, such as the loan being sanctioned on 30.11.2020 while the board meeting agenda to discuss availing financial facilities was circulated for a meeting on 8.12.2020 (Para 44).

2. Civil Court Jurisdiction in Cases of Fraud (Mardia Chemicals): The judgment reiterated the principle laid down in Mardia Chemicals Ltd , stating:

"...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..." (Para 30, 51)

3. Impact of DRT's Finding on Locus Standi: A crucial aspect of the ruling was the interplay between the DRT's order and the Section 34 bar. The Court reasoned:

"The contention of Mr Kantak needs to be accepted since the language used in Section 34 to attract bar is with regard to 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." (Para 64) "The question of fraud and collusion and the relief claimed in the suit of declaration that the loan facility and the mortgage created in favour of defendant no.1 is a nullity, is certainly not coming within the jurisdiction of DRT or under the SARFAESI Act. Such declaration is only permissible under the Specific Relief Act." (Para 65) The Court found that if the DRT itself held that the petitioner was not an "aggrieved person" under Section 17 of SARFAESI, then the bar under Section 34 for matters determinable by DRT might not apply to the petitioner for seeking reliefs (like declaration of fraud) that the DRT cannot grant.

4. NCLT Order and Bank of Baroda Precedent: The Court also noted that the NCLT order, appended to the plaint, prima facie supported the petitioner's claims of mismanagement. Furthermore, reliance was placed on a Division Bench judgment of "this Court" in Bank of Boroda Vs Gopal Shriram Panda , which clarified that civil court jurisdiction is not absolutely barred, particularly where civil rights of persons other than borrowers/guarantors are involved, or where fraud is alleged within the parameters of Mardia Chemicals .

5. Perversity in Lower Court Orders and Preventing Miscarriage of Justice: The High Court found the observations of both the Commercial Court and the First Appellate Court regarding the absence of specific pleadings on fraud to be "clearly perverse" (Para 48).

"Applying the above proposition to the matter in hand, one thing is clear that by rejecting a plaint when there are specific pleadings regarding fraud and collusion by giving specific instances, there by applying Section 34 of the SARFAESI Act, clearly amounting to miscarriage of justice." (Para 80) The Court observed that throwing the petitioner out from both the DRT (for lack of locus) and the Civil Court (due to the SARFAESI bar) would leave him practically remediless.

Final Decision and Implications

The High Court made the rule absolute, quashing and setting aside the impugned orders of the Commercial Court and the First Appellate Court. The plaint in Commercial Suit No. 2/2023 was restored to the file of the Commercial Court to be decided in accordance with law.

This judgment underscores that while Section 34 of the SARFAESI Act ousts civil court jurisdiction for matters falling within the DRT's purview, this bar is not absolute. Specific and detailed allegations of fraud, particularly involving the secured creditor, can provide a window for civil suits. Moreover, if a party is deemed to lack locus standi before the DRT, the argument for barring their civil suit seeking distinct reliefs like a declaration of fraud becomes weaker. The decision reinforces the civil court's role in adjudicating complex fraud claims that may fall outside the specialized scope of the DRT.