Supreme Court Sets Aside High Court Order in Bank Loan Recovery Dispute

The case of The Authorised Officer, State Bank of India v. M/S Allwyn Alloys Pvt. Ltd. & Others revolves around a dispute regarding loan recovery and mortgage enforcement. The Supreme Court set aside the Bombay High Court’s order and directed the matter back to the High Court for fresh adjudication.

Background of the Case

The dispute arose when M/S Allwyn Alloys Pvt. Ltd. and its directors defaulted on a loan obtained from the State Bank of India (SBI). As a result, SBI initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to recover its dues.

The primary issue was regarding a flat, Flat No. C-203 in Blue Heaven Apartment, Bandra (West), Mumbai, which was mortgaged to the bank by the company directors to secure the loan. However, two individuals (Respondents 5 and 6) claimed ownership of the flat based on an unregistered Memorandum of Understanding (MoU) dated March 13, 2011.

Following the due process, SBI obtained a favorable order from the Debt Recovery Tribunal (DRT), which was upheld by the Debt Recovery Appellate Tribunal (DRAT), allowing the bank to proceed with the auction of the flat.

Aggrieved by the decision, Respondents 5 and 6 approached the Bombay High Court, which granted them liberty to approach a “competent forum” for adjudicating their rights. SBI challenged this ruling before the Supreme Court.

Arguments by the Petitioner (SBI)

The State Bank of India contended that:

• The Bombay High Court’s order effectively overlooked the findings of the DRT and DRAT, which had already ruled against Respondents 5 and 6.
• Under Section 34 of the SARFAESI Act, civil courts and other forums cannot interfere with matters that are within the exclusive jurisdiction of the DRT.
• The alleged MoU presented by Respondents 5 and 6 was not a legally recognized document and was created after the mortgage was established.
• As per records, the flat was already transferred to the names of the company directors, and the bank held a valid equitable mortgage.
• The High Court’s direction for Respondents 5 and 6 to approach another forum was legally impermissible as it contravened DRT’s jurisdiction.

Arguments by the Respondents

The individuals claiming ownership of the flat (Respondents 5 and 6) argued that:

• They had an MoU for purchasing the flat and had made payments toward it.
• The transfer of the flat to the company’s directors was fraudulent and done without their consent.
• The High Court was right in giving them an opportunity to establish their ownership before another competent forum.
• They were in physical possession of the flat, which was not adequately considered by the DRT and DRAT.

Supreme Court’s Observations

The Supreme Court examined the matter extensively and noted several key aspects:

1. SARFAESI Act Bars Civil Jurisdiction

The Court held that the High Court’s decision to allow the respondents to approach another forum was contrary to the express provisions of the SARFAESI Act:

“No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a DRT or DRAT is empowered to determine under the SARFAESI Act.”

2. The Mortgage was Established Before the MoU

The Court found that the flat was already mortgaged to SBI before the alleged MoU was executed:

“The share certificate of the flat was transferred to the names of the company’s directors, and the society had recorded the fact of mortgage with the bank.”

The MoU, being an unregistered and subsequent document, could not override the established mortgage.

3. The DRT and DRAT Findings Were Final

The Supreme Court emphasized that both the DRT and DRAT had examined all the evidence and found that Respondents 5 and 6 had failed to establish ownership:

“The DRT and DRAT have concurrently held that the mortgage was valid and the claim of Respondents 5 and 6 was without legal basis.”

The High Court’s failure to consider these findings was a legal error.

4. High Court’s Direction to Deposit Rs. 25 Lakhs was Improper

The Supreme Court also set aside the High Court’s order directing SBI to deposit Rs. 25 lakhs in an interest-bearing account:

“Such a direction was wholly uncalled for. The High Court erred in issuing financial directions without legal justification.”

Final Judgment

The Supreme Court ruled in favor of SBI and set aside the Bombay High Court’s order:

• The High Court’s ruling was quashed.
• Respondents 5 and 6 were not permitted to challenge the mortgage in any other forum.
• The auction process for the flat could proceed.
• The bank was not required to deposit Rs. 25 lakhs.

The Court remanded the matter back to the High Court with instructions to adjudicate the issue in accordance with the SARFAESI Act and previous rulings.

Conclusion

This ruling reinforces the exclusive jurisdiction of the DRT and DRAT in matters of loan recovery and secured assets. The Supreme Court’s decision prevents attempts to bypass the SARFAESI Act and ensures that banks can recover debts without undue interference from other forums.

Petitioner Name: The Authorised Officer, State Bank of India.
Respondent Name: M/S. Allwyn Alloys Pvt. Ltd. & Others.
Judgment By: Justice Dipak Misra, Justice A.M. Khanwilkar, Justice D.Y. Chandrachud.
Place Of Incident: Mumbai, Maharashtra.
Judgment Date: 17-05-2018.

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