Allahabad High Court Rejects Civil Court Relief In Covid Loan Diversion Case, Upholds SARFAESI Action

On 11 May, the Allahabad High Court dismissed an appeal seeking to restrain SARFAESI recovery proceedings against Srijan Hospital, holding that civil courts cannot interfere where a borrower breaches loan conditions by diverting funds and statutory remedies under the SARFAESI Act, 2002 are available.

A Bench of Justice Abdul Shahid held:

“The appellant/plaintiff has materially changed the purpose of the aforesaid loan. He had entered into an agreement with the respondent-bank under the LGSCAS Loan Guarantee Scheme for construction of a building, furnishing, and purchase of equipment for the Covid-affected healthcare sector.”

Srijan Hospital availed loan facilities from Bank of Baroda under a Covid-affected healthcare sector scheme. The bank sanctioned Rs 2.84 crore, comprising a term loan of Rs 2.59 crore and a cash credit limit of Rs 25 lakh, for construction of a hospital building, furnishing, and purchase of equipment. The bank disbursed only Rs 1.95 crore before initiating SARFAESI proceedings.

The borrower filed a civil suit seeking an injunction against recovery, arguing that the bank failed to disburse the full sanctioned amount and initiated premature recovery action. The trial court rejected the injunction application on 21 February 2026, leading to the present appeal.

The bank opposed the appeal, relying on Section 34 of the SARFAESI Act, 2002, contending that civil courts lack jurisdiction where the Debts Recovery Tribunal and Appellate Tribunal exercise jurisdiction. It further submitted that proceedings under Section 14 had already been initiated in respect of the secured asset.

The High Court held that Section 34 bars civil court jurisdiction and Section 35 gives the Act overriding effect over other laws. It also recorded that the trial court found a clear breach of sanction terms, as the borrower diverted funds from hospital construction to hotel construction without prior approval.

The Bench further noted that the secured property stood mortgaged, SARFAESI proceedings had already been initiated, and possession had been taken under an order dated 24.12.2025. It also found that the plaintiff suppressed material facts and failed to approach the trial court with clean hands.

Accordingly, the High Court found no infirmity in the trial court's order and dismissed the appeal.

For Appellants: Advocates Anil Kumar Rai and Rishi Kant Rai