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17 July 2025

Interplay Between Civil Court Jurisdiction And SARFAESI Remedies: Analysing The Judicial Bar Under Sections 34 And 17 And The Due Diligence Obligations Of Banks

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The primary objective of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI ACT), as deduced from its Preamble, is to promote the financial health of banks...
India Finance and Banking

The primary objective of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI ACT), as deduced from its Preamble, is to promote the financial health of banks and financial institutions by enabling them to recover non-performing assets (NPAs) quickly and efficiently. By empowering secured creditors to enforce their security interests without the intervention of courts, the Act introduces a significant shift in India's legal and financial landscape.

For the effective enforcement of debt recovery provisions, the Debt Recovery Tribunals (DRTs) have been established under the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act). These tribunals provide a specialized forum for secured creditors to swiftly recover debts. If aggrieved by a DRT order, creditors can appeal to the Debts Recovery Appellate Tribunal (DRAT), ensuring a fair and just resolution. Notably, the DRTs and DRATs are vested with the same powers as civil courts under the Code of Civil Procedure (CPC), 1908, as per Section 22 of the RDDBFI Act, enabling them to adjudicate debt recovery matters with precision and authority.

Related: Banking and Finance Law Firm

Legal Framework Under The SARFAESI ACT

Under section 13, secured creditors are permitted to recover their dues directly from the borrower without the need to approach a court or the tribunal. When a borrower's account is classified as an NPA, the creditor may issue a notice under section 13(2) specifying the outstanding dues and identifying the secured assets to be used for recovery. The borrower is given 60 days to repay or object to the proposed action. If no repayment is made within this period, the secured creditor is empowered to take measures under section 13(4), such as taking possession of the secured asset, or taking over the management of the business, or appointing a manager, or requiring third parties to pay amounts owed to the borrower.

Section 17: Remedy For Aggrieved Borrowers

Despite granting significant powers to secured creditors, the SARFAESI Act ensures a safeguard for borrowers under section 17, which allows any aggrieved person, typically the borrower to challenge the actions taken by the secured creditor under section 13(4) by filing an application before the Debt Recovery Tribunal (DRT) within 45 days. This remedy acts as a judicial check on the creditor's powers, ensuring that recovery measures are not misused or applied arbitrarily.

Importantly, the aggrieved party is not required to approach a civil court, as DRTs have exclusive jurisdiction in such matters. The jurisdiction of the DRT can be determined based on the location of the secured asse, the place where the cause of action arose or the branch of the bank or financial institution where the borrower's account is maintained.

Upon receiving the application, the DRT is required to examine whether the secured creditor has complied with the provisions of the SARFAESI Act and its accompanying rules. If the measures taken by the bank are found to be lawful, the creditor may proceed with recovery. However, if the DRT finds that the creditor failed to follow due process, it may declare the measures invalid, restore possession or management of the secured asset to the borrower, and issue other necessary directions.

Section 17 also empowers the DRT to adjudicate upon tenancy or leasehold rights claimed by borrowers or third parties in the secured assets and to pass appropriate orders concerning the enforcement of security interests.

As per the statute, the DRT must dispose of such applications within 60 days of filing. However, this period may be extended up to a maximum of four months, provided the reasons for delay are recorded in writing. If the DRT fails to decide the matter within this extended period, the aggrieved party may then approach the Debt Recovery Appellate Tribunal (DRAT) seeking directions for expeditious disposal of the case.

Section 34: Exclusion Of Civil Court Jurisdiction

Section 34 of the SARFAESI Act imposes a clear judicial bar by stating that civil courts have no jurisdiction over matters that DRTs or DRATs are empowered to adjudicate. This provision prevents the initiation of parallel proceedings in civil courts and ensures that enforcement of security interest is not delayed by conventional litigation.

Thus, civil courts are excluded from interfering in the enforcement process under SARFAESI once the creditor invokes section 13(4).

Yet, this bar is not absolute. The judiciary has clarified that civil courts retain jurisdiction in cases that do not fall within the purview of the DRT. If a relief sought does not pertain to Section 13(4) measures or enforcement of security interest, civil courts can entertain such claims.

The Interplay Of Sections 17 And 34 Of The SARFAESI ACT

The relationship between sections 17 and 34 of the SARFAESI Act has been the subject of extensive judicial interpretation. These provisions, while appearing to restrict access to civil courts, are not intended to oust jurisdiction in every circumstance. Instead, they establish a clear demarcation between matters that must be adjudicated by the Debt Recovery Tribunal (DRT) and those that rightfully remain within the jurisdiction of civil courts.

Section 17 provides a remedy for persons aggrieved by the measures taken by a secured creditor under section 13(4) of the Act. Such persons may approach the DRT for redress, and the DRT is empowered to examine whether the actions of the secured creditor conform to the Act and the rules thereunder.

Section 34, on the other hand, bars civil courts from entertaining suits or proceedings in matters where the DRT or the Appellate Tribunal is empowered to adjudicate. This provision is aimed at preventing parallel litigation and ensuring that SARFAESI related disputes are resolved expeditiously.

However, courts have consistently held that this bar is not absolute. The jurisdiction of civil courts is only ousted to the extent that the DRT is competent to adjudicate upon a matter under the SARFAESI Act. Where the dispute falls outside the scope of the DRT's powers, civil courts retain jurisdiction under section 9 of the Code of Civil Procedure.

In Allwyn Alloys v. Authorised Officer (SBI), the Supreme Court held that once proceedings under section 13 are initiated, all matters concerning the right, title, or interest in the mortgaged property fall within the purview of the DRT, thereby ousting the jurisdiction of civil courts under section 34.

Similarly, in Madras Petrochem Ltd. v. BIFR & Ors., the Court reiterated that if action has been initiated under section 13, civil courts lose jurisdiction over the mortgaged property and the proper forum becomes DRT/DRAT under section 17.

In Jagdish Singh v. Heeralal & Ors., Supreme Court made it clear that civil courts lack jurisdiction to entertain disputes arising out of enforcement actions under section 13(4). All objections must be addressed through the statutory remedy provided under section 17, which prescribes a 45-day window to approach the DRT.

However, courts have established a nuanced distinction, holding that disputes unrelated to or preceding SARFAESI actions under section 13(4), such as those concerning title validity or pre-existing sales, are beyond the DRT's purview and fall within the jurisdiction of civil courts.

Analysis of the Recent Judgement of the Supreme Court In CENTRAL BANK OF INDIA & ANR. V. SMT. PRABHA JAIN & ORS.

This landmark judgement further clarified that while the SARFAESI Act enables speedy recovery by financial institutions, it does not confer the DRT with the authority to adjudicate disputes involving title or the validity of sale/mortgage deeds unrelated to measures under section 13(4). It was held that:

  • The DRT's jurisdiction under section 17(3) is restricted to examining the legality of creditor actions under section 13(4).
  • Reliefs seeking declarations regarding the invalidity of sale and mortgage deeds, which are not connected to measures under section 13(4), lie outside the purview of the DRT.
  • Consequently, such matters are not barred under section 34 and can be tried by civil courts under section 9 of the CPC.
  • Furthermore, the Court reaffirmed that a plaint cannot be partially rejected under Order VII Rule 11 CPC. If even one relief survives, the entire plaint must be retained and tried on the merits.

Due Diligence Obligations Of Bankers Under SARFAESI ACT

Before initiating recovery proceedings under the SARFAESI Act, 2002, it is crucial that banks and financial institutions adhere to certain procedural and statutory requirements. These obligations are designed to ensure transparency, fairness, and legal compliance, while also safeguarding the rights of borrowers.

Preliminary Requirements Before Initiating Proceedings

At the outset, a secured creditor must serve a demand notice under section 13(2) of the Act, allowing the borrower a minimum of 60 days to repay the outstanding debt. This notice must clearly:

  • Indicate the total amount due from the borrower;
  • Identify the secured assets intended to be enforced for recovery; and
  • Inform the borrower of their right to make objections or representations.

Additionally, it is essential that the borrower's account be classified as a Non-Performing Asset (NPA) in accordance with RBI guidelines before any action is taken under the Act, including issuance of the section 13(2) notice.

Consideration Of Borrower's Representation Under Section 13(3A)

If the borrower responds to the Section 13(2) notice with any representation or objection, the secured creditor is bound by Section 13(3A) to duly consider it. If the creditor finds the representation unacceptable, they must record their reasons for non-acceptance; and communicate these reasons to the borrower within 15 days from receiving the representation. This requirement upholds basic principles of natural justice and procedural fairness.

Pre-Conditions For Taking Action Under Section 13(4)

Actions under section 13(4), such as taking possession of the secured asset or taking over management, can only be taken after the 60-day notice period has lapsed without repayment. The secured creditor must ensure full compliance with the preconditions laid out under the Act to avoid legal infirmities.

Compliance With Security Interest (ENFORCEMENT) Rules, 2002

Upon initiation of action under section 13(4), banks must strictly comply with the procedure laid down under the Security Interest (Enforcement) Rules, 2002. For example:

  • Under Rule 8(1), where the secured asset is immovable property, a possession notice must be delivered to the borrower and affixed on the property.
  • Under Rule 8(2), the notice must also be published in two newspapers, one of which must be in the vernacular language.
  • Under Rule 8(5), before selling the asset, the bank must obtain a valuation of the property from an approved valuer and fix a reserve price.
  • Under Rule 8(6), a 30-day sale notice must be issued to the borrower and published appropriately.

These rules are mandatory and non-compliance may render the enforcement action invalid.

Right Of The Borrower To Approach The Drt Under Section 17

As per Section 17(1) of the Act, once the bank takes any of the measures under section 13(4), the borrower has a right to approach the Debt Recovery Tribunal (DRT) within 45 days. Thus, the bank must ensure all its actions are legally compliant and justifiable before the DRT.

Consent Requirement In Multi-Creditor Situations [Section 13(9)]

Where there are multiple secured creditors, section 13(9) mandates that no action under section 13(4) can be taken unless creditors holding at least 60% in value of the outstanding amount consent to the proposed measures. Thus, in such cases, the initiating bank must secure the requisite approval from other lenders prior to taking any recovery steps.

Conclusion

In conclusion, the SARFAESI Act strikes a delicate balance between empowering banks to efficiently recover debts and protecting borrowers' rights. While sections 17 and 34 provide a framework for borrowers to challenge bank actions before the DRT, they also limit civil court interference in recovery proceedings. Importantly, courts have established that civil suits remain a viable recourse for issues beyond the DRT's jurisdiction. The Act's effectiveness ultimately hinges on banks' diligence in adhering to procedural formalities, ensuring that enforcement actions are fair, transparent, and non-arbitrary. By doing so, banks can leverage the Act's benefits while upholding the principles of fairness and due process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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