Case Study: Central Bank of India & Anr. V. Smt. Prabha Jain & Ors.

"The civil courts retain jurisdiction over disputes involving title and validity of transactions, as these fall outside the purview of the SARFAESI Act, and a plaint cannot be partially rejected under Order VII Rule 11 CPC." 

Citation: Civil Appeal No. 1876 of 2016

Date of Judgment: 9^th January, 2025

Court: Supreme Court of India

Bench: J.B. Pardiwala (J) and R. Mahadevan (J)

Facts

• The plaintiff, Smt. Prabha Jain, inherited a one-third share of a plot of land after the death of her husband. Her late husband’s elder brother, Sumer Chand Jain, without partitioning the land among the heirs, illegally divided the property and sold a portion to Parmeshwar Das Prajapati.
• The purchaser, Parmeshwar Das Prajapati, mortgaged the land to the Central Bank of India to secure a loan. The borrower defaulted on the loan, leading the bank to take possession under Section 13(4) of the SARFAESI Act and proceed with auctioning the property.

1. The plaintiff filed a civil suit seeking: Declaration that the sale deed executed by Sumer Chand Jain and the mortgage deed executed by Parmeshwar Das Prajapati were illegal.
2. Restoration of possession of the property.
3. Damages for the period the property was wrongfully occupied.

• The Central Bank of India moved an application under Order VII Rule 11 CPC, claiming that the suit was barred by Section 34 of the SARFAESI Act, as the relief of possession must be adjudicated by the Debt Recovery Tribunal (DRT).

Decision of the Trial Court

The trial court, upon hearing the application under Order VII Rule 11 CPC, filed by the Central Bank of India, dismissed the civil suit filed by the plaintiff, Smt. Prabha Jain. The court’s decision was based on its interpretation of Section 34 of the SARFAESI Act, which limits the jurisdiction of civil courts in matters where the Debt Recovery Tribunal (DRT) or Appellate Tribunal has exclusive authority.

The trial court held that the plaintiff’s reliefs concerning the ownership and possession of the property, as well as the validity of the sale deed and mortgage deed, were intrinsically linked to the enforcement proceedings initiated by the bank under Section 13(4) of the SARFAESI Act. As such, it concluded that these issues fell within the exclusive jurisdiction of the DRT, thereby barring the civil court from entertaining the suit.

The trial court acknowledged that the plaintiff sought three main reliefs:

1. Declaration that the sale deed executed by Sumer Chand Jain and the mortgage deed by Parmeshwar Das Prajapati were illegal.
2. Restoration of possession of the property.
3. Damages for the period of wrongful occupation of the property.

The court observed that while reliefs (a) and (c) touched on issues of title and damages, relief (b) specifically involved restoration of possession under Section 17 of the SARFAESI Act. As possession matters under SARFAESI proceedings are exclusively adjudicated by the DRT, the trial court interpreted the entire suit to be barred under Order VII Rule 11 CPC.

The court opined that when a suit involves reliefs that are barred by law, Order VII Rule 11(d) allows for rejection of the plaint in its entirety. Since one of the primary reliefs (restoration of possession) was barred under the SARFAESI Act, the trial court rejected the entire plaint instead of allowing the matter to proceed for adjudication of the other reliefs.

Decision of the Supreme Court

The Court clarified that the civil court's jurisdiction is ousted only in matters where the DRT or Appellate Tribunal has exclusive authority under the SARFAESI Act. Issues concerning the validity of sale and mortgage deeds, and disputes involving title, fall squarely within the jurisdiction of civil courts as these are beyond the scope of the SARFAESI Act. The Court noted that a plaint cannot be partially rejected under Order VII Rule 11 CPC. If any relief sought in the plaint is within the jurisdiction of the civil court, the entire plaint must survive. In this case, the first two reliefs

1. challenging the sale and mortgage deeds
2. challenging within the civil court's jurisdiction, even if the third relief (possession) pertained to the SARFAESI Act.

The Court emphasized that the SARFAESI Act provides a mechanism for speedy recovery of debts but does not empower the DRT to adjudicate complex civil disputes, such as determining title or the validity of sale deeds executed prior to the invocation of the SARFAESI Act.

The Court held that under Section 17(3) of the SARFAESI Act (pre-2016 amendment), the DRT has the power to "restore" possession only to borrowers or persons claiming under the borrower. The plaintiff, claiming independent title, could not seek restoration of possession through the DRT.

The Court instructed that if a civil court finds that some reliefs are barred by law, it must refrain from making adverse observations against those reliefs during an Order VII Rule 11 application. Instead, the court must leave those issues undecided.

Key legal issues discussed

1. Does Section 34 of the SARFAESI Act oust civil court jurisdiction in this case?

No

Section 34 of the SARFAESI Act bars civil courts from entertaining suits or proceedings in matters where the Debt Recovery Tribunal (DRT) or Appellate Tribunal is empowered to act under the Act. The purpose of this provision is to ensure the expeditious recovery of debts by financial institutions without interference from civil courts. However, the Supreme Court, in its judgment, clarified the limits of this jurisdictional bar and held that Section 34 does not oust the jurisdiction of civil courts in cases involving questions of title or the validity of transactions, which are outside the scope of the SARFAESI Act.

The Supreme Court emphasized that the jurisdiction of civil courts is ousted only in matters specifically covered under the SARFAESI Act, such as disputes related to enforcement actions under Section 13(4) (possession, sale, or recovery proceedings). It stated that questions involving ownership, title, or validity of sale and mortgage deeds fall outside the jurisdiction of the DRT and must be adjudicated by civil courts. In relation to this court in paragraph 23 observed

“Plaintiff could not have sought from DRT the relief of being handed over the possession. DRT would have no jurisdiction to grant such relief to her. Hence, the 17 Plaintiff’s third relief in her suit is also not barred by Section 34 of the SARFAESI ACT”

Further, in paragraph 31 the court noted that “in State Bank of Patiala v. Mukesh Jain & Anr.[1] relied on Section 34 and declared that no civil court can entertain any suit wherein the proceedings initiated under Section 13 are challenged. Thus, this judgment highlighted that when the measures under Section 13 are challenged before the civil court, its jurisdiction to look into the challenge is ousted under Section 34”

While dealing with this question court drew a clear distinction between: cases related to the recovery of possession or enforcement of security under the SARFAESI Act, which fall within the jurisdiction of the DRT, and Cases involving disputes over ownership, title, or the legality of transactions, which are beyond the purview of the DRT.

In this case, the plaintiff sought a declaration of the illegality of the sale deed and mortgage deed executed by third parties. The Court held that these issues involve adjudication of title and validity, which are not matters the DRT is competent to decide under the SARFAESI Act. Court in paragraph 20 observed that

“If the adoption is valid, Q had title and the mortgage in favour of the bank would be valid. If the adoption was invalid, Z would be the owner & Q’s mortgage would be invalid. The civil court will have jurisdiction to decide upon the validity of the adoption, not the DRT”

2. Can a plaint be partially rejected under Order VII Rule 11 CPC?

No

The Supreme Court, decisively held that a plaint cannot be partially rejected under Order VII Rule 11 CPC.  This provision requires either the entire plaint to be rejected or none of it, based on the grounds specified in the rule.

The Court emphasized that the concept of partial rejection of a plaint is not permissible under Order VII Rule 11 CPC. If any one of the reliefs in the plaint is found to be valid and maintainable, the entire plaint must proceed to trial. Partial rejection would contradict the procedural integrity and legal framework provided under the CPC. In paragraph number 24 court observed that

“Even if we would have been persuaded to take the view that the third relief is barred by Section 17(3) of the SARFAESI Act, still the plaint must survive because there cannot be a partial rejection of the plaint under Order VII, Rule 11 of the CPC. Hence, even if one relief survives, the plaint cannot be rejected under Order VII, Rule 11 of the CPC. In the case on hand, the first and second reliefs as prayed for are clearly not barred by Section 34 of the SARFAESI ACT and are within the civil court’s jurisdiction. Hence, the plaint cannot be rejected under Order VII Rule 11 of the CPC”

Further the Court observed that civil courts must avoid making determinations about reliefs that are barred by law while deciding an application under Order VII Rule 11 CPC. Instead, the court should allow the entire plaint to proceed if any part of it survives scrutiny. Court in paragraph 25 observed

“If the civil court is of the view that one relief (say relief A) is not barred by law but is of the view that Relief B is barred by law, the civil court must not make any observations to the effect that relief B is barred by law and must leave that issue undecided in an Order VII, Rule 11 application. This is because if the civil court cannot reject a plaint partially, then by the same logic, it ought not to make any adverse observations against relief B.”

The Court referred to its earlier decisions, such as in Sejal Glass Ltd. v. Navilan Merchants (P) Ltd.[2] and Madhav Prasad Aggarwal & Anr. v. Axis Bank Limited & Anr.[3], to reinforce the principle that partial rejection of a plaint is impermissible and plaint can either be rejected as a whole or not at all. It is not permissible to reject the plaint in part or against specific reliefs or defendants. Court in paragraph 34 court held that

“In the Sejal Glass case, an application was filed by the defendant(s) under Order 7 Rule 11(d) CPC stating that the plaint disclosed no cause of action. The civil court held that the plaint is to be bifurcated as it did not disclose any cause of action against the Director's Defendant(s) 2 to 4 therein. On that basis, the High Court had opined that the suit can continue against Defendant 1 company alone. The question considered by this Court was whether such a course is open to the civil court in exercise of powers under Order 7 Rule 11(d) CPC. The Court answered the said question in the negative by advertising several decisions on the point which had consistently held that the plaint can either be rejected as a whole or not at all. The Court held that it is not permissible to reject plaint qua any particular portion of a plaint including against some of the defendant(s) and continue the same against the others. In no uncertain terms the Court has held that if the plaint survives against certain defendant(s) and/or properties, Order 7 Rule 11(d) CPC will have no application at all, and the suit as a whole must then proceed to trial.”

The judgment highlights the importance of preserving the procedural integrity of trials. Allowing partial rejection would lead to fragmented litigation, procedural confusion, and inconsistent adjudication. By ensuring that the entire plaint proceeds if any part of it survives, the Court upheld the fundamental principles of justice and judicial efficiency.

3. Does the DRT have jurisdiction to grant possession to a third party with independent claims?

No

The Supreme Court in this case clarified the jurisdictional limitations of the Debts Recovery Tribunal (DRT) under the SARFAESI Act. The Court categorically held that the DRT cannot grant possession to third parties with independent claims, as its powers are confined to adjudicating disputes between secured creditors and borrowers.

The Court highlighted that under Section 17(3) of the SARFAESI Act (pre-2016 amendment), the word used is “restore” possession, not “hand over” possession. The DRT has the authority to return possession only to the borrower or persons claiming through the borrower, not to third parties with independent or adverse claims to the secured asset. Court in paragraph 23 held that

“In the unamended Section 17(3), the word used is “restore” and not “hand over”. As per Cambridge English dictionary, the word “restore” means “to return something or someone to an earlier good condition or position”. Under Section 17(3), the DRT has the power to “restore” possession which would mean that it has the power to return possession to the person who was in possession when the bank took over possession. DRT only has power to “restore” possession; it has no power to “hand over” possession to a person who was never in possession when the bank took over possession.”

“…. However, it would be quite illogical for the Parliament to empower the DRT to direct the secured creditor to hand over possession to some third party who was never in possession in the first place.”

Further, the Court acknowledged that disputes involving title claims, such as determining the validity of wills, adoption, or partition, are beyond the DRT’s jurisdiction. These matters fall under the jurisdiction of civil courts, as they require adjudication on ownership rights and legal complexities unrelated to the enforcement of security under the SARFAESI Act. Court in paragraph 20 observed that

“The answer to the aforesaid would depend on whether Q’s adoption was valid or not. If the adoption is valid, Q had title and the mortgage in favour of the bank would be valid. If the adoption was invalid, Z would be the owner & Q’s mortgage would be invalid. The civil court will have jurisdiction to decide upon the validity of the adoption, not the DRT.”

The court also highlighted that the primary purpose of the DRT under the SARFAESI Act is to provide a speedy mechanism for resolving disputes between secured creditors and borrowers. The Court noted that granting possession to third parties with independent claims would go beyond the DRT’s statutory mandate. Court in 18 observed that

“SARFAESI Act is enacted essentially to provide a speedy mechanism for recovery of debts by banks and financial institutions. The SARFAESI Act has not been enacted for providing a mechanism for adjudicating upon the validity of documents or to determine questions of title finally. The DRT does not have the jurisdiction to grant a declaration with respect to the mortgage deed or the sale deed as sought by the Plaintiff. The jurisdiction to declare a sale deed or a mortgage deed being illegal is vested with the civil court under Section 9 of the Code of Civil Procedure. Therefore, the civil Court has the jurisdiction to finally adjudicate upon the first two reliefs.”

The Court explicitly stated that Section 17 of the SARFAESI Act does not empower the DRT to grant reliefs to individuals whose claims are adverse to those of the borrower. The powers conferred on the DRT are restricted to reversing measures taken by the secured creditor and restoring possession to the borrower or persons claiming through the borrower. Court in paragraph 24 observed that

" Even if we would have been persuaded to take the view that the third relief is barred by Section 17(3) of the SARFAESI Act, still the plaint must survive because there cannot be a partial rejection of the plaint under Order VII, Rule 11 of the CPC. Hence, even if one relief survives, the plaint cannot be rejected under Order VII, Rule 11 of the CPC. In the case on hand, the first and second reliefs as prayed for are clearly not barred by Section 34 of the SARFAESI ACT and are within the civil court’s jurisdiction. Hence, the plaint cannot be rejected under Order VII Rule 11 of the CPC”

DRT does not have the jurisdiction to grant possession to a third party with independent claims. Its powers under Section 17(3) are limited to restoring possession to borrowers or persons claiming through them. Any disputes involving ownership, title, or independent claims must be resolved in civil courts, as they fall outside the scope of the SARFAESI Act. This ensures a clear separation between the roles of the DRT and civil courts in resolving disputes.

[1] (2017) 1 SCC 53.

[2] (2018) 11 SCC 780.

[3] (2019) 7 SCC 158.

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