Kerala High Court Bars Loan Recovery Under SARFAESI Act After Civil Suit

Kerala High Court Bars Loan Recovery Under SARFAESI Act After Civil Suit

A recent judgment by the Kerala High Court has established clear boundaries for secured creditors pursuing loan recoveries under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The case involved a borrower who had availed of a car loan and disputed the outstanding amount claimed by the bank.

Justice Easwaran S. delivered the verdict, observing that a bank cannot initiate recovery measures under the SARFAESI Act if it has already filed a civil suit seeking recovery of dues, and that suit was subsequently dismissed. The court's reasoning hinges on the concept of a "legally recoverable debt."

The borrower in this case had taken a car loan of ₹9 lakh and secured it with necessary documents. The bank, however, issued a notice under Section 13(2) of the SARFAESI Act demanding repayment of the loan amount. The borrower contended she had already paid the entire loan amount and no further dues remained. This disagreement prompted her to file a writ petition challenging the bank's notice.

The plot thickened when the bank, during the writ petition's pendency, filed a separate commercial suit before the Commercial Court, Kottayam, to recover the alleged dues. However, this suit was also dismissed, concluding that no amount was owed by the borrower.

The borrower's counsel argued that the bank's pursuit of recovery proceedings under the SARFAESI Act, after the civil court's dismissal of their suit, was illogical. Since the court had ruled no recoverable debt existed, the SARFAESI Act provisions were no longer applicable.

The bank, on the other hand, presented a contrasting viewpoint. They argued that recovery measures under the SARFAESI Act and filing civil suits were independent procedures. They asserted their right as a secured creditor to initiate parallel proceedings for recovering dues, and that a writ petition could not be used to halt the SARFAESI Act process. The bank further challenged the maintainability of the writ petition and suggested the borrower approach the Debt Recovery Tribunal (DRT) under the SARFAESI Act.

The court acknowledged the Supreme Court's precedent in "Authorised Officer, State Bank of Travancore v. Mathew K.C. (2018)," which established that writ petitions against SARFAESI Act measures are only entertained in exceptional circumstances. The court also referred to other landmark judgments that outlined these exceptional circumstances. Ultimately, the court concluded that a writ petition was generally not maintainable unless exceptional circumstances could be proven.

The court then delved into the definition of "debt" under the Recovery of Debts and Bankruptcy Act, 1993. It was defined as a legally recoverable liability arising from various sources, including a decree or order from a civil court. Since the civil court had dismissed the bank's suit, the court determined that no recoverable debt existed for the creditor to pursue under the SARFAESI Act.

The court strongly criticised the bank's attempt to bypass the civil court's judgment. It highlighted that the bank could not simply ignore the court's finding of no outstanding dues and continue recovery proceedings. The court deemed the bank's actions irrational and a violation of the statute.

Furthermore, the court acknowledged that the bank was not obligated to file a civil suit. However, since they chose that route and it resulted in a dismissal, the borrower should not be forced to seek an alternative remedy through the DRT under Section 17 of the SARFAESI Act.

Recognising exceptional circumstances as outlined by the Supreme Court, the court invoked its writ jurisdiction and declared the writ petition maintainable. The court justified its intervention due to the bank's actions being outside its legal authority.

The bank's counsel informed the court about their appeal against the civil court's dismissal. The Kerala High Court acknowledged this appeal and clarified that the bank's ability to pursue recovery proceedings would be subject to the appellate court's orders.