District Magistrate Cannot Adjudicate Disputes While Considering Banks' Pleas For Possession Under SARFAESI: Chhattisgarh HC

The Chhattisgarh High Court has held that a District Magistrate assisting a bank or financial institution in taking possession of a mortgaged property cannot decide disputes concerning the rights of the lender, borrower, or a subsequent purchaser.

The court observed that such disputes must be decided by the Debts Recovery Tribunal (DRT) and not by the District Magistrate while considering a lender's request for assistance in taking possession of the secured property.

Justice Amitendra Kishore Prasad allowed a writ petition filed by Aadhar Housing Finance Ltd and set aside the order dated September 6, 2021 passed by the District Magistrate, Rajnandgaon, rejecting the financial institution's application for taking possession of the secured asset.

"Moreover, while considering an application under Section 14 of the SARFAESI Act, the District Magistrate is not vested with the jurisdiction to adjudicate upon the merits of the secured creditor's claim or to determine disputed questions of fact concerning the rights of the parties. Such adjudicatory issues fall within the jurisdiction of the Debts Recovery Tribunal, as contemplated under the statutory scheme of the SARFAESI Act.", the Court observed. 

The case arose after two borrowers obtained a loan of ₹7,96,388 from Aadhar Housing Finance Ltd and mortgaged their residential property as security under an agreement dated May 24, 2017. After the borrowers defaulted, the financial institution classified the loan account as a Non Performing Asset on August 10, 2019 and issued a demand notice under the SARFAESI Act seeking repayment of ₹8,29,436.

As the borrowers failed to repay the outstanding amount, the financial institution approached the District Magistrate under Section 14 of the Act. On September 6, 2021, the District Magistrate rejected the application on the ground that the secured property had already been transferred to a subsequent purchaser through a registered sale deed dated December 13, 2019. Aggrieved by the decision, Aadhar Housing Finance approached the High Court.

The Court observed that the role of the District Magistrate under Section 14 of the SARFAESI Act is ministerial in nature and does not involve adjudication of disputes between the borrower and the secured creditor.

Relying on the Supreme Court's decision in R.D. Jain & Co. v. Capital First & Ors., the Court reiterated that the District Magistrate is required to verify the statutory requirements and the correctness of the information furnished by the secured creditor, rather than examine objections or disputes concerning the secured asset.

The Bench further held that the subsequent transfer of the mortgaged property to a third party could not, by itself, confer jurisdiction upon the District Magistrate to examine the validity or legal consequences of such transfer while considering an application under Section 14.

"As in the instant case, the District Magistrate, passed the impugned order dated 06.09.2021, holding thereby that the application of petitioner under Section 14 of the SARFAESI Act cannot be allowed for the fact that the secured asset has been sold to respondent no. 03 (Subsequent Purchaser), vide registered sale deed dated 13.12.2019, which is erroneous and unsustainable in view of the foregoing discussion."

The Court also held that by rejecting the application on this ground, the District Magistrate had travelled beyond the scope of his statutory jurisdiction and undertaken an adjudicatory exercise not contemplated under the provision.

Accordingly, the High Court remanded the matter to the District Magistrate, Rajnandgaon for fresh consideration of Aadhar Housing Finance's application strictly in accordance with law.

The District Magistrate was directed to pass an appropriate order within 30 days of receiving a copy of the High Court's order, after affording the concerned parties an opportunity of hearing. The financial institution was also directed to extend full cooperation in the proceedings.

For the Petitioner: Advocate Atul Kumar Kesharwani.

For Respondent No. 3: Advocate Pushpendra Kumar Patel.

For the State/Respondent No. 4: Government Advocate Soumitra Kesharwani.