Friday, March 24, 2017

Supreme Court on DRT’s Jurisdiction for Small Debts

[Guest post by Yudhvir Dalal, 5th Year B.A.LL.B. (Hons.), The National University of Advanced Legal Studies (NUALS), Kochi.]

The Supreme Court late last year in State Bank of Patiala v. Mukesh Jain[i] held that under section 17 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) a Debt Recovery Tribunal (‘DRT’) is entitled to entertain a matter even if the debt involved less than rupees ten lakhs (Rs. 1,000,000). 

Statutory Position

Section 1(4) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ( ‘RDB Act’) provides that the provisions of the RDB Act shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is less than rupees ten lakhs or such other amount, being not less than rupees one lakh (Rs. 100,000), as the Central Government may, by notification, specify. The DRT and the Debt Recovery Appellate Tribunal (‘DRAT’) have been constituted under section 3 and section 8 respectively of RDB Act. If the borrower fails to fully discharge its liability, then section 13(4) of the SARFAESI Act empowers the secured creditor to recover its secured debt by any of the measures mentioned therein.

Moreover, if any person (including borrower) is aggrieved by recovery measures taken under section 13(4) of the SARFAESI Act, then under section 17 that party can appeal to the DRT. Section 34 of the SARFAESI Act stipulates that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or a DRAT is empowered by or under SARFAESI Act and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under SARFAESI Act or under the RDB Act. Section 31(h) of the SARFAESI Act provides that the provisions of that Act shall not apply to any security interest for securing repayment of any financial asset not exceeding rupees ten lakhs.         

The legality and constitutional validity of RDB Act as a whole and the Central Government’s power to constitute DRT and DRAT, tribunals other than tribunals constituted under Articles 323A and 323B have been upheld in Delhi High Court Bar Association v. Union of India[ii].The constitutional validity of the SARFAESI Act except then section 17 (2) has been upheld by the Supreme Court in Mardia Chemicals Ltd. v. Union of India[iii]. 

Factual matrix

In the present case under discussion, the appellant (State Bank of Patiala) lent rupees eight lakhs (Rs. 800,000) to the respondent no. 1 as secured debt. Upon the respondent committing a default in repayment of the said loan, the appellant issued notice under section 13(2) of the SARFAESI Act and sought further proceedings. The respondent challenged the said proceedings before the civil court. The appellant filed an application for rejection of the said civil suit under order 7 rule 11 of the Civil Procedure Code by contending that in light of section 34 read with section 13(2) of SARFAESI Act, the civil court is restricted from entertaining any matter arising under the provisions of SARFAESI Act. The said application of the appellant was rejected by the trial court, as the subject-matter of the suit i.e. the amount sought to be recovered was less than rupees ten lakhs and in accordance with section 1(4) of the RDB Act the provisions of RDB Act would not apply if the subject-matter is less than rupees ten lakhs. Therefore, the DRT had no jurisdiction to entertain the present matter. The High Court of Delhi by way of its judgment[iv] dated April 16, 2005 confirmed the view of trial court and rejected the appellant’s application.    

Issue Involved

Whether the DRT can entertain an appeal under Section 17 of the SARFAESI Act even when the debt amount is less than rupees ten lakhs?

Judgment

The Supreme Court held that the DRT has jurisdiction to entertain an appeal in accordance with section 17 of the SARFAESI Act even if the amount involved is less than rupees ten lakhs. But, the said appellate jurisdiction need not be misunderstood with the original jurisdiction of the DRT. The Court was of the opinion that the application submitted by the appellant under order 7 rule 11 should have been granted by the trial court as, according to Section 34 of the SARFAESI Act, a civil court has no jurisdiction to entertain any appeal arising under the Act. Consequently, the impugned judgment as well as the order rejecting the application filed under order 7 rule 11 were set aside.  

Comments

The Supreme Court in this judgment has carried harmonious construction of provisions of RDB Act and the SARFAESI Act. However, in doing so the court has filled in a gap where there existed lacunae in the two legislation. On a perusal of section 1(4) of the RDB Act, it is explicit that it restricts the jurisdiction of the DRT and the DRAT constituted under it to matters having a subject-matter above rupees ten lakhs unless notified to the contrary by the Central Government. Neither the RDB Act nor the SARFAESI Act distinguishes between original and appellate jurisdiction of DRT.

On one hand, from a reading of section 31(h) of the SARFAESI Act it is implied that the provisions of SARFAESI Act can be applied for securing repayment of any financial asset exceeding rupees one lakh and there is no other provision in the SARFAESI Act restricting the jurisdiction of the legislation only to matters above rupees ten lakhs. This view has been explicitly upheld by the High Court of Kerala in Joseph George v. Joint Registrar[v]. The Kerala High Court further held that the power conferred on the DRT under the provisions of the SARFAESI Act are over and above that Tribunal’s powers conferred on it under the RDB Act. Hence, basically under Section 13 of the SARFAESI Act, a secured creditor can recover its secured debt if the secured debt exceeds rupees one lakh. Furthermore, if any party is aggrieved by the proceedings under section 13(4), then in terms of section 17 it can appeal to DRT. Hence, an appeal to the DRT can lie even from the disputes where subject-matter is above rupees one lakh but less than rupees ten lakhs. However, on the other hand, section 1(4) of the RDB Act forbids the DRT from entertaining any matter involving debts below rupees ten lakhs. In the present case, in order to harmonize these two provisions, the Court distinguished between the appellate and original jurisdiction of DRT. In doing so the Court filled the gap left by the Parliament.

There is a need for the legislature to fill the void left by it and to harmonize the provisions of both statutes. The apt step would be that Parliament inserts an explanation to section 17 of the SARFAESI Act which categorically stipulates that the appellate jurisdiction of DRT under this provision can be availed for any subject-matter above rupees one lakh. In doing so, the legislature would also be able to ensure that no aggrieved debtor is left remediless. If a party would not be able to approach a civil court in the light of section 34 then that aggrieved party would have the option of approaching the DRT.    

- Yudhvir Dalal




[i] (2017) 1 SCC 53
[ii] AIR 1995 Del 323
[iii] (2004) 4 SCC 311
[iv] SBI v. Mukesh Jain, 2005 SCC OnLine Del 1522
[v] AIR 2005 Ker 305

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