SARFAESI Actions In Good Faith Cannot Be Challenged In Civil Courts; DRT Remedy Must Be Pursued: Supreme Court

The Supreme Court has recently held that a challenge to action taken under the SARFAESI Act can be pursued only through the remedies provided by the Act, while civil courts cannot entertain matters that the Debt Recovery Tribunal (DRT) or Debt Recovery Appellate Tribunal (DRAT) is empowered to determine.

A bench of Justice B.V. Nagarathna and Justice Augustine George Masih set aside the Madhya Pradesh High Court's May 8, 2024 review order, which had given Jayant Vitamins Ltd liberty to pursue a suit for damages or criminal proceedings.

The bench restored the high court's February 9, 2024 order, which had dismissed the company's writ petition after noting that objections regarding irregularities in the SARFAESI procedure could be raised before the DRT or DRAT.

“Any action taken under the provisions of the SARFAESI Act which is in good faith cannot be assailed so also for any omission under the provisions of the said Act. Similarly, a challenge to an action taken under the provisions of the SARFAESI Act can be assailed only under the provisions of the said Act and the Civil Court does not have jurisdiction to entertain any suit or other proceedings in respect thereof,” the court observed.

The dispute arose from credit facilities extended to Jayant Vitamins against mortgaged and hypothecated properties. After the company defaulted, its account was classified as a Non-Performing Asset. The DRT-II, Mumbai, subsequently directed the company to pay the bank ₹28.28 crore with future interest at 12% per annum.

The bank later assigned Jayant Vitamins' debts, assets and liabilities to International Asset Reconstruction Co. Pvt. Ltd., which initiated SARFAESI proceedings and took possession of the secured assets after issuing a Section 13(2) notice in January 2009. In 2023, it sold the hypothecated plant and machinery to Apexter Corporation for ₹2.84 crore.

Jayant Vitamins challenged the sale before the Madhya Pradesh High Court, which initially directed it to pursue the DRT/DRAT remedy. On review, the high court allowed other appropriate proceedings, including a damages suit or criminal proceedings. The Supreme Court set aside this modification, relying on Sections 32 and 34.

The provisions bars courts from entertaining matters that the DRT or DRAT is empowered to determine under the SARFAESI Act. It also bars injunctions against action taken under powers conferred by the Act.

The court also referred to Section 35, which gives the SARFAESI Act overriding effect where its provisions are inconsistent with another law.

The bench explained that if Jayant Vitamins sought damages for the action taken by International Asset Reconstruction, there first had to be a finding that the action was wrongly initiated. Such a finding, it held, could be made by the DRT and not a civil court because of the express bar under Section 34.

On criminal proceedings, the court noted that actions or omissions under the SARFAESI Act are protected where they have been taken in good faith.

“We find that the High Court was not right in reserving liberty to respondent No.1 herein to seek remedies by filing a suit for claiming damages etc. or for pursuing criminal proceedings while allowing Review Petition No.368/2024 vide order dated 08.05.2024 and by modification of its earlier order dated 09.02.2024,” the bench observed.

The top court accordingly set aside the May 8, 2024 review order and restored the February 9, 2024 order.

It clarified that Jayant Vitamins remained free to seek an appropriate remedy against International Asset Reconstruction under the SARFAESI Act. All contentions were left open for the parties to raise before the DRT.

For Petitioner: Amar Dave, Sr. Advocatem Advocates Himanshu Bhushan, AOR, Shagun Srivastava

For Respondent: Ashutosh Dubey, AOR, Advocates Ashutosh Dubey, Shashibhushan Nagar, Rahul Mishra, Rajshri Dubey, Amit P. Shahi, Sunandan Mishra, Abhishek Chauhan, Rishabh Bhardwaj, Govind Kashyap, Anjan Datta, R Anbhule, Om Prakash Yadav, Lokesh Raghav