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KEY TAKEAWAYS

  • Mere mentioning of wordings such as “Fraud/ Fraudulent” in clever legal drafting does not create an exemption to section 34 of the SARFAESI Act.
  • The “fraud” test must be satisfied in the event if a petition comprises allegations of frauds. Mere stating of “fraud/ fraudulent document”is not enough to satisfy the test but needs material evidence.
  • Due process to follow relevant to debt recovery matters are through Debt Recovery Tribunal.

BACKGROUND

  • 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 favour 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.

OBSERVATIONS OF THE COURT

  • The assertion of “fraud” has been mentioned in the averment 31 and 46 of the petition. Yet the averments or any other incudes substantial details relevant to the said “fraudulent actions”.
  • Adhering to the Civil Procedure Code of 1908 Order VI Rule 4; it can be seen that no material particulars have been pleaded so as to constitute a pleading of “fraud”.
  • Further the pleadings laid out in averment 31 and 46 does not satisfy the test of “fraud” established through section 17(1) of the Indian Contract Act of 1872.
  • “There is one rule which is better established than any other, it is that in cases of fraud, Undue influence, Coercion, the pleading must set forth full particulars and case can only be decided on the specifics as laid.”
  • A 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 court did not addressed the issue between the two parties but only the matter of maintainability of the suit was taken into consideration and dismissed the petition.

QUESTIONS

  • What are your thoughts on SARFAESI Act?
  • Do you think section 34 of SARFAESI Act creates a castupon rendering justice?
  • Should mere mentioning of “fraud”needs to be considered as an exemption for section 34 of SARFAESI?
  • Do you believe the view taken by the Supreme Court rendered Justice?

Share your questions & opinions in the comments section below.

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