Court’s Decision:
The Division Bench of the Allahabad High Court dismissed Commercial Appeal No. 5 of 2025, upholding the Commercial Court’s decision rejecting the appellant’s suit and interim injunction application. The High Court held that the commercial suit seeking a declaration that the classification of the account as Non-Performing Asset (NPA) was void was barred by Section 34 of the SARFAESI Act, 2002. The Court ruled:
“Declaration of account of the appellant as N.P.A. could not be seen in isolation qua the measures taken or to be taken or may be taken in pursuance of the power conferred under the Act, 2002.”
Accordingly, the appeal was dismissed, and the impugned order dated 04.03.2025 passed by the Commercial Court was affirmed.
Facts:
The appellant company had availed cash credit and term loan facilities from the respondent Bank. Upon default, the Bank declared the appellant’s account as NPA on 29/30.07.2024. The appellant filed Commercial Suit No. 1 of 2025, seeking:
- A declaration that the notice classifying its account as NPA was void, alleging violation of RBI guidelines and failure to reschedule the loan account.
- Compensation of ₹10 lakhs for mental agony and business loss.
However, the Commercial Court had earlier dismissed an application filed by the appellant seeking exemption from pre-institution mediation under Section 12-A of the Commercial Courts Act, which was also upheld by a Coordinate Bench.
Subsequently, the respondent Bank filed an application under Order VII Rule 11(d) CPC for rejection of the plaint, claiming the suit was barred under Section 34 of the SARFAESI Act. Meanwhile, the Bank initiated proceedings under Section 13 of the SARFAESI Act, issuing a demand notice on 06.08.2024, possession notice on 21.10.2024, and sale notices dated 06.01.2025 and 28.02.2025.
The Commercial Court allowed the Bank’s application and rejected the plaint and injunction application, which led to the filing of the present appeal.
Issues:
- Whether the suit filed by the appellant challenging the declaration of its account as NPA was barred under Section 34 of the SARFAESI Act?
- Whether the Commercial Court erred in taking into account subsequent measures taken under Section 13(4) while deciding the application under Order VII Rule 11(d) CPC?
Petitioner’s Arguments:
- The bar under Section 34 of the SARFAESI Act is not applicable since the declaration of an account as NPA is not a measure under Section 13(4).
- The Debt Recovery Tribunal (DRT) can only be approached under Section 17 of the SARFAESI Act after measures under Section 13(4) are taken, and not for challenging NPA classification.
- The maintainability of a suit should be judged based on the cause of action as on the date of institution; subsequent developments (like initiation of SARFAESI proceedings) cannot be used to reject the plaint.
- While adjudicating under Order VII Rule 11(d), only the plaint should be considered, not the defendant’s pleadings.
Relied upon:
- Bank of India v. Maruti Civil Works, 2024 (1) ICC 396
- Mrs. Leelamma Mathew v. Indian Overseas Bank, 2023 All SCR 1
Respondent’s Arguments:
- The Bank issued demand notice under Section 13(2) on 06.08.2024, and after due process, issued possession and sale notices.
- The appellant, through amendment, sought to challenge the SARFAESI proceedings, thus bringing the matter within the jurisdiction of the DRT.
- Even the challenge to NPA classification is within the scope of DRT’s jurisdiction under the Act.
- The suit was clearly barred under Section 34 and rightly rejected.
Relied upon:
- Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311
- Jagdish Singh v. Heeralal, (2014) 1 SCC 479
- Gaurav Lubricants Pvt. Ltd. v. Tamilnadu Mercantile Bank Ltd., 2022 (6) ALT 529
- IFCI Venture Capital Funds Ltd. v. SRGP Corporation Ltd., 2024 SCC OnLine Del 1148
Analysis of the Law:
The Court closely analyzed Section 13 of the SARFAESI Act. It observed that declaration of an account as NPA under Section 13(2) is part of the process leading to measures under Section 13(4). Hence, it cannot be isolated from the SARFAESI framework.
The Court noted that once the Bank initiated measures under Section 13(4), including possession and sale notices, the appellant itself amended its plaint and sought injunctive relief, effectively challenging the entire process under the SARFAESI Act.
The Court emphasized:
“Action under Section 13(4) of the Act, 2002 is dependent upon and is in furtherance of the event(s) mentioned in sub-section (2) and cannot be read in isolation.”
Precedent Analysis:
The High Court placed strong reliance on the Supreme Court’s decision in Mardia Chemicals Ltd. v. Union of India, particularly para 50, where it was held:
“Bar of civil court thus applies to all such matters which may be taken cognizance of by the Debt Recovery Tribunal, apart from those matters in which measures have already been taken under sub-section (4) of Section 13.”
The Court distinguished Mrs. Leelamma Mathew on facts, noting that it dealt with a damages claim unrelated to the validity of SARFAESI measures. Similarly, the Bombay High Court judgment in Maruti Civil Works was found inapplicable as it concerned the maintainability of an appeal against the rejection of an application under Order VII Rule 11, not its allowance.
Court’s Reasoning:
The Court held that:
- The appellant’s own pleadings—including applications under Order VI Rule 17 and Order XXXIX Rules 1 and 2—referred to the SARFAESI proceedings, making them part of the suit record.
- Even if defence pleadings are excluded, the plaint (as amended) and interim applications disclosed that the suit challenged actions under the SARFAESI Act.
- Consequently, the bar under Section 34 squarely applied.
Conclusion:
The Allahabad High Court concluded that the suit was barred by Section 34 of the SARFAESI Act. It upheld the Commercial Court’s rejection of both the plaint under Order VII Rule 11(d) and the interim injunction application.
The appeal was dismissed in its entirety.
Implications:
This judgment reinforces the legal position that civil courts do not have jurisdiction to entertain challenges related to any matter that falls within the scope of the SARFAESI Act and can be adjudicated by the DRT. It also reaffirms the principle that even pre-action steps like NPA classification, if linked to SARFAESI proceedings, cannot be challenged in civil court.