Only Civil Court can grant relief of declaration that personal guarantees stand discharged

1. In Mrs. Sunayana Malhotra & Ors. vs ICICI Bank [IA No.5814/2009 in CS(OS)No.527/2009; [2010 (1) DRTC 353 (Delhi); Decided on 6 October, 2009] hon’ble Delhi High Court was considering an application of the defendant under Order 7 Rule 11 of the CPC for rejection of the plaint for the reason of the relief claimed in the suit being barred by Section 18 of the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (‘DRT Act’) r/w Section 34 of the Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘Securitization Act’). The plaintiffs had instituted the suit for declaration and permanent injunction. They had pleaded that the plaintiffs had executed personal guarantees in favour of the defendant; that the plaintiffs had sold their shareholding in the company and had resigned from the Board of Directors of the company and were left with no concern with the company; that the defendant had got issued notice dated 31st December, 2008 claiming the plaintiffs to be jointly and severally liable for the debts of the company; that the plaintiffs were not so liable for the debts of the company not only for the reason of having transferred their shares and resigned from the Board of Directors of the company but also for the reason of the defendant having altered the terms & conditions of the credit facility with the company. The plaintiffs had further pleaded that notwithstanding the aforesaid and in breach of the RBI guidelines with regard to "willful defaulters", the defendant had threatened to declare the plaintiffs as willful defaulters and which would interfere with the plaintiffs' right to carry on other businesses. The plaintiffs had claimed the relief of declaration that the personal guarantees executed by the plaintiffs in favour of the defendant stand discharged, the relief of perpetual injunction restraining the defendant from invoking the personal guarantees and for mandatory injunction directing the defendant to produce the documents of personal guarantee and for cancellation thereof. The Delhi High Court observed and held as follows.

“4. In Nahar Industrial Enterprises Ltd. Vs. Hong Kong and Shanghai Banking Corporation MANU/SC/1330/2009…..the Supreme Court has held that no independent proceedings can be initiated by a debtor before DRT; a debtor under the common law of contract as also in terms of the agreement may have an independent right; no forum has been created for endorsement of that right - jurisdiction of civil court is barred only in respect of matters which strictly come within the purview of Section 17 of DRT Act and not beyond the same; the civil court therefore will continue to have jurisdiction; ………..DRT can issue a certificate only for recoveries of dues of a bank - it cannot pass a decree; that the statutory provisions contained in Sections 17 & 18 of DRT Act cannot be said to have ousted the jurisdiction of the civil court qua the suits filed by the debtor ………The court quoted portion of judgment in Indian Bank Vs. A.B.S. Marine Products Pvt. Ltd. AIR 2006 SC 1899 laying down that Sections 17 & 18 of DRT Act had not been amended and jurisdiction had not been conferred on DRT even after amendment of Section 19 to try independent suits or proceedings initiated by borrowers or others against Banks/Financial Institutions; nor the jurisdiction of civil court barred in regard to such suits/proceedings.

5. In the light of the aforesaid dicta, the plea for rejection of the plaint in so far as on the ground of the relief claimed therein being barred by Section 18 of DRT Act is not tenable and is rejected.”

2. In State Bank of India vs Sagar & Others {Civil Revision Application No.33 of 2010, Nagpur Bench, Decided on 11 February, 2011} hon’ble Bombay High Court considered the challenge to the order dated 23-2-2010 passed by the learned 2nd Joint Civil Judge, Senior Division, Amravati, rejecting the application filed under Order 7, Rule 11 of the Civil Procedure Code in Special Civil Suit No.52 of 2010 for rejection of the plaint on the ground that it is barred by the provisions of Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as "the said Act"). The High Court has, inter alia, held as follows.

“33. In view of above, the sum and substance of the decision is that:

(i) The jurisdiction of the Civil Court to entertain, try and decide any suit or proceeding in respect of the property, which is the subject matter of security interest created in favour of a secured creditor, is barred only to the extent of the matters, which the Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under the Act to determine.(Para 18)

(ii) The jurisdiction of the Civil Court in respect of the matters, which do not fall within the jurisdiction of the Debts Recovery Tribunal or its Appellate Tribunal under Sections 17 and 18 of the said Act, is not ousted or barred under the provision of Section 34 of the said Act and the Civil Court continues to exercise such jurisdiction. (Para 18)

(iii) In order to decide the question as to whether the jurisdiction of the Civil Court under Section 9 of the Civil Procedure Code is ousted or not, the real test would be to find out whether the Debts Recovery Tribunal under Section 17, is empowered to hold an enquiry on a particular question and to grant relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 shall decide the extent of exclusion of jurisdiction of Civil Court to decide the dispute in respect of the suit property. (Para 18)” (emphasis supplied by me)

3. Thus, it would be advantageous to analyse the law on the subject as follows:

(i) Hon’ble Supreme Court in Nahar Industrial Enterprises Ltd vs Hongkong & Shanghai Banking Corp. {2009 (8) SCC 646; 2009 (2) DRTC 273 (SC); Decided on 29 July, 2009} observed that:

“If the Tribunal was to be treated to be a civil court, the debtor or even a third party must have an independent right to approach it without having to wait for the Bank or Financial Institution to approach it first. The continuance of its counter-claim is entirely dependant on the continuance of the applications filed by the Bank. Before it no declaratory relief can be sought for by the debtor. (emphasis supplied)

(ii) Bombay High Court in State Bank of India vs Sagar & Others (supra) has held (in para 18) that the real test would be to find out whether the Debts Recovery Tribunal under Section 17, is empowered to hold an enquiry on a particular question and to grant relief in respect thereof. The extent of jurisdiction of the Debts Recovery Tribunal under Section 17 shall decide the extent of exclusion of jurisdiction of Civil Court to decide the dispute in respect of the suit property.

(iii) In Mrs. Sunayana Malhotra & Ors. vs ICICI Bank (supra) Delhi High Court held (in para 5) that the plea for rejection of the plaint in so far as on the ground of the relief claimed therein being barred by Section 18 of DRT Act,1993 is not tenable and is rejected.

(iv) In view of aforesaid analysis, and by necessary implication of ratio of judgment of Delhi High Court in Mrs. Sunayana Malhotra & Ors. vs ICICI Bank (supra), it may be safely concluded that only a civil court can grant relief of declaration that the personal guarantees stand discharged, and therefore, DRT does not have this jurisdiction, power and authority under Section 17 of DRT Act, 1993.(END)

Note: The views expressed are my personal and a view point only.

Author:

Narendra Sharma

Consultant (Arbitration, DRT, Securitisation)

E-mail: nkdewas@yahoo.co.in