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Electrosteel Castings Limited Vs UV Asset Reconstruction Company Limited & Others (2021): Mere Allegation Of Fraud Without Particulars Not Sufficient To Get Over Bar On Civil Suit Under Section 34 SARFAESI

Kawmini Liyanage ,
  01 December 2021       Share Bookmark

Court :
Supreme Court of India
Brief :

Citation :
REFERENCE: [2021] SC 682

DATE OF JUDGEMENT:
26h November 2021

JUDGES:
Justice M R Shah
Justice Sanjiv Khanna

PARTIES:
Electrosteel Castings Limited (Appellant)
UV Asset Reconstruction Company Limited& Others (Respondents)

SUBJECT

The following judgement deals with section 34 ofThe Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act which establishes the judicial limitation on jurisdiction for matters related to Debt Recovery.The Apex Court gave consideration to section 17(1) of the Indian Contract Act of 1872 l. The section established the “Fraud test” which needs to be satisfied in relation to establish a particular fraudulent action has emerged in the given scenario.

AN OVERVIEW

  • Defendant/Respondent 3 (D/R3) burrowed a mortgage loan facility from Defendant/Respondent 2 (D/R2) namely SREI Infrastructure Finance Limited.
  • The Plaintiff/ Appellant (P/A) was the guarantor. In favor of Defendant/Respondent 2 the mortgage facility was created by Appellant/Plaintiff as a security for the above-mentioned mortgage.
  • Defendant/Respondent 3 defaulted the repayment which led to a debt of INR 9,237,500,000.
  • Therefore, the Insolvency Bankruptcy Code of 2006 was implemented against the said Defendant/Respondent 03.
  • Following the IBC Act 2006 a sequence of action has been initiated by the D/R 2 against D/R 3.
  • According to Security Interest (Enforcement) Rules 2002 P/A was issued notice by D/R2 and published a possession notice at the premises which used as the security for the mortgage.
  • The primary action was instituted by the P/A at the High Courts of Madras following claims were pleaded through the action;

I. To declare the Respondent/Defendant 1 is not a secured creditor as there no debt to pay for R/D 1.

II. To declare the possession notice published by the R/D 2 as null and void and render justice.

  • This action was dismissed by the Madras High Court as the property was located outside the jurisdiction of the court. And “The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act” Of 2002 (SARFAESI) section 34 barred Civil Courts jurisdiction to hear matters related to debt recovery which falls under the sole jurisdiction of Debt Recovery Tribunal.
  • P/A filled an appeal before the Division Bench of the High Court which uphold the decision given by the single judge of Madras High Court.
  • Hence the current appeal at Supreme Court was filled by the P/A. alleging “fraud” by the defendant/ Respondent which grants an exemption to section 34 of SARFAESI Act.
  • Another suit was filed by P/A in Debt Recovery Tribunal of Chennai following section 17 (1) of against the possession notice published by the D/R 3.

IMPORTANT PROVISIONS

THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT OF 2002 (SARFAESI):

  • Section 34- 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 other 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).

INDIAN CONTRACT ACT NO OF 1872

  • Section 17(1) -“Fraud” defined. — “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract: —
  1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
  2. The active concealment of a fact by one having knowledge or belief of the fact;
  3. A promise made without any intention of performing it;
  4. Any other act fitted to deceive;
  5. Any such act or omission as the law specially declares to be fraudulent. Explanation. —Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

CIVIL PROCEDURE CODE OF 1908:

  • Order VI Rule 4 - In all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, willful default, or undue influence, and in all other cases in which particulars may be necessary beyond such as are exemplified in the forms aforesaid, particulars (with dates and items if necessary) shall be stated in the pleading.

ISSUES

The following are the major issues framed by the Court-

  • Whether the exemption to section 34 of SARFAESI Act applies to the appeal?
  • Whether the appeal provide material evidence to support “undue influence” by the respondent?
  • Whether the appeal provide material evidence to support “Coercion” by the respondent?
  • Whether the mentioned “fraud/ fraudulent action” sufficiently covers the test of fraud set out in Section 17(1) of the Indian Contract Act of 1872??

ANALYSIS OF THE JUDGEMENT

The Electrosteel Castings Limited v. UV Asset Reconstruction Company Limited& Others is filed by the appellant to obtain following claims.

I. To declare the Respondent/Defendant 1 is not a secured creditor as there no debt to pay for R/D 1.

II. To declare the possession notice published by the R/D 2 as null and void and render justice.

The action was based on a mortgage that has been obtained from Respondent 2 by Respondent 3 where the Appellant has been the guarantor who provided security for the mortgage. As the debt has not been settled the Respondent 2 has taken further actions. Which has been essentially challenged through the appeal.

The action clearly emphasis its relativity towards Debt Recovery which comes under the sole jurisdiction of Debt Recovery Tribunal. Prior actions which have been filed at the High Court has dismissed the applications due to its Latent Lack of Jurisdiction.The application made to Supreme Court has been made cleverly to defeat the jurisdiction limitation through countering the section 34 of the SARFAESI Act. By way of using the word/ wording “Fraud/ Fraudulent”. The Supreme Court could have dismissed the petition in the first instance by agreeing with the single and division bench of High Court of Madras decision. But has decided to proceed with the hearing. Which brings an important Judicial Precedent. Which involves the section 34 of the SARFAESI Act?

As the decision was given the court has emphasized on the fact that the Appellant has only merely stated “Fraud/ Fraudulent” in the petition without providing substantial material to prove the fraud or to establish fraudulent action. Hence the court has considered to apply the “Fraud Test” following the section 17(1) of the Indian Contract Act of 1872. Since the set facts of the petition did not satisfy the test, it was confirmed that the petition does not stipulate a commission of Fraud. But only a mere allegation.

Following the decided judgments of Bishundeo Narain & Anr. vs. Seogeni Rai & Jagernath

Canara Bank vs. P. Selathal & Ors and Ram Singh vs. Gram Panchayat Mehal Kalan & Ors

The Court declared that mere stating of the word/ wording “Fraud/ Fraudulent” only lay down an allegation which is does not tantamount to a pleading of “fraud”. The rule 4 of Order VI of the Civil Procedure Code has not been properly followed by the said appellant. Further, in the case of Bishundeo Narain & Anr. Vs. Seogeni Rai & Jagernath it states that “...One rule which is better established than any other is that, in case of fraud, Undue Influence and Coercion. The parties pleading must set forth full particulars. There can be no departure from them in evidence”. The “fraud” has to be pleaded with essential facts otherwise it cannot be established.

Ram Singh vs. Gram Panchayat Mehal Kalan & Ors stated that if the suit is barred by law, the plaintiff cannot be granted exemption by way of clever drafting. Which is visible in the case in hearing. The mere drafting of “fraud/ fraudulent action” is not sufficient to surpass the section 34 of the SARFAESI Act. Hence the suit is not permissible at all and should follow the proper channel through Debt Recovery Tribunal.

The Supreme Court has relied on several decided cases in order to deliver the above judgment. Yet has not mentioned a single statement relevant to the claims that has been made through the petition. Or else the gravity of opting from the due procedure to follow when law has already established appropriate jurisdiction for certain matters.

CONCLUSION

The Supreme Court held that the decision granted by the single bench as well as the Division Bench stood correct. Hence, the appropriate jurisdiction to hear the case vests upon the Debt Recovery Tribunal.

Click here to download the original copy of the judgement

 
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