Civil Courts Cannot Preempt SARFAESI Action, Karnataka High Court Sets Aside Injunction Against SBI

The Karnataka High Court has recently set aside an interim injunction that had restrained the State Bank of India from enforcing a corporate guarantee against Patel Engineering Limited.

A Division Bench of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha held that the Commercial Court in Bengaluru could not have injuncted SBI from proceeding under the SARFAESI Act or the Recovery of Debts and Bankruptcy Act.

The bench noted that Section 34 of the SARFAESI Act bars courts from granting injunctions in respect of any action “taken or to be taken” under the statute.

The court found that the suit filed by Patel Engineering was aimed at stalling recovery steps. It observed that “ PEL has essentially filed a suit to preempt and obstruct the proceedings initiated by the SBI before the NCLT under the IBC and under the SARFAESI Act and to prevent SBI from initiating any recovery proceedings under the RDB Act”

Rejecting the company's contention that the bar would not apply because no RDB proceedings had been initiated when the suit was filed, the Bench clarified, “Thus, even though no proceedings had been instituted under the RDB Act when the suit was filed, no injunction could have been granted by the learned Commercial Court as Section 34 of the SARFAESI Act also covered matters in respect of which action could be taken, though not taken, under the SARFAESI Act or the RDB Act.”

The dispute arose from a Rs. 49 crore term loan sanctioned by SBI in 2018 to GM Infinite Dwelling India Private Limited for a residential project in Bengaluru. Patel Engineering had given a corporate guarantee for the loan.

When the borrower defaulted, the account was declareda NPA in December 2022. SBI then issued a demand notice under Section 13(2) of the SARFAESI Act claiming more than Rs. 54 crore.

In response, Patel Engineering moved the Commercial Court seeking a declaration that nothing was payable under the guarantee. It argued that its liability, if any, was confined to the value of its share in the mortgaged land. The Commercial Court granted an interim order restraining SBI from taking steps under the guarantee while the suit was pending.

Before the High Court, the company maintained that its liability had to be determined first and that such declaratory relief could not be granted by the Debts Recovery Tribunal.It also submitted that since no proceedings under the RDB Act had been filed at the time of the suit, the jurisdiction of the civil court was not barred.

SBI maintained that the guarantee was unconditional and that the company's liability was coextensive with that of the principal borrower. It argued that the suit was in substance a defence to recovery and could not be used to prevent statutory action.

Agreeing with SBI, the High Court held that the dispute over liability under the guarantee was essentially a defence to the bank's recovery claim and therefore fell within the domain of the DRT. It described the argument that the Commercial Court could restrain SBI from initiating proceedings as “fundamentally flawed.”

Referring to Section 34 of the SARFAESI Act, the Bench reiterated that courts cannot grant injunctions against actions taken or that may be taken under the SARFAESI or RDB Acts.

The appeal was accordingly allowed, and the interim injunction was set aside.

For Appellant: Advocate Lomesh Kiran N.

For Respondent: Senior Advocate K.G. Raghavan, with Advocate Manu Prabhakar Kulkarni