Partition Suit Challenging Mortgage, SARFAESI Enforcement Barred: Karnataka High Court

The Karnataka High Court has ruled that a partition suit can be barred under Section 34 of the SARFAESI Act when the reliefs sought, taken together, amount to a challenge to a mortgage and an attempt to stop a secured creditor from enforcing its security interest.

Justice Sachin Shankar Magadum observed,

“Therefore, a declaration by the Civil Court that the mortgage itself is illegal and null and void, coupled with a permanent injunction against the Bank, would directly undermine and nullify the statutory enforcement process. This is precisely the kind of interference which Section 34 seeks to prevent.”

The court made the observation while allowing a petition filed by Tyger Capital Limited, formerly known as Adani Capital Pvt. Ltd., against an order of the Senior Civil Judge and Principal JMFC, Yellapur, sitting at Mundgod.

The trial court had rejected the lender's application seeking rejection of the suit under Order VII Rule 11(d) of the Code of Civil Procedure and Section 34 of the SARFAESI Act.

The suit was filed by family members claiming shares in the property and seeking partition and separate possession. But they also sought a declaration that a mortgage created by one of the co-sharers was illegal, null and void and not binding on them. They further sought an injunction against the lender.

The high court examined whether the dispute was genuinely about determining the family members' shares or whether the partition suit was, in substance, being used to challenge the mortgage and the lender's enforcement action.

Section 34 of the SARFAESI Act bars a civil court from entertaining matters that the Debts Recovery Tribunal (DRT) is empowered to determine under the Act. Section 17 provides a remedy before the DRT to a person aggrieved by measures taken by a secured creditor under Section 13(4).

In simple terms, Section 13(4) allows a secured creditor to take specified steps to enforce its security after the borrower defaults and the statutory demand process is completed. Section 17 allows a person aggrieved by such enforcement measures to challenge them before the DRT.

The court stressed that Section 34 does not create a blanket bar on partition suits merely because the property is mortgaged.

A co-sharer who asserts an independent, pre-existing right in the property can approach a civil court for determination of their share, partition, and separate possession. The DRT, the court noted, does not have jurisdiction to pass a partition decree.

The issue is therefore what the suit is actually asking the civil court to decide.

“What is the real controversy which the Civil Court is called upon to adjudicate, and is that controversy one which the DRT is empowered to determine under the SARFAESI Act?”

Applying that test, the court found that the present suit went beyond a claim for partition.

The family members had sought a declaration that the mortgage itself was illegal, null, and void. They also sought a permanent injunction restraining the lender from interfering with the property. The court held that these reliefs directly affected the lender's statutory enforcement rights.

“The plaintiffs are not merely seeking determination of their independent share in the suit property. They are seeking to invalidate the mortgage created in favour of the secured creditor and to restrain the secured creditor from proceeding against the mortgaged property.”, the court noted.

It also considered allegations concerning a relinquishment deed, mutation entry, and the creation of the mortgage. However, it made clear that it was not deciding whether those allegations were true or whether the mortgage was otherwise valid.

The court held that where a party seeks to have the mortgage declared void and restrain the secured creditor from enforcing the security, the dispute falls within the statutory framework of the SARFAESI Act.

“Thus, the plaintiffs seek to achieve through the Civil Court what the statutory scheme requires them to challenge before the DRT.”, it noted.

The high court accordingly allowed Tyger Capital's petition, set aside the trial court's order, and allowed the application under Order VII Rule 11(d) CPC read with Section 34 of the SARFAESI Act.

The plaint was rejected as barred by Section 34.

The court clarified that it had expressed no opinion on the merits of the family members' alleged shares, the relinquishment deed, the mutation entry, the validity of the mortgage, or the legality of the lender's SARFAESI measures. Those issues were left open to be considered by the competent forum.

For Petitioner: Advocate Shriya S Katagimath

For Respondents: Advocates Iranagouda K Kabbur and Abhishek G Hosakeri