The Supreme Court recently issued a stay on proceedings in a commercial suit involving Aditya Birla Finance Ltd., challenging a Bombay High Court ruling that allowed a commercial suit alleging fraud in a loan and mortgage agreement to proceed, despite the jurisdictional bar under Section 34 of the SARFAESI Act. The bench, comprising Chief Justice of India Sanjiv Khanna and Justice Sanjay Kumar, granted the stay following a special leave petition (SLP) filed by Aditya Birla Finance Ltd. (the petitioner), contesting the Bombay High Court’s decision.
Context and SARFAESI Act’s Section 34
Section 34 of the SARFAESI Act restricts civil courts from hearing cases in which the Debt Recovery Tribunal (DRT) or Appellate Tribunal has jurisdiction to adjudicate matters related to secured assets. Aditya Birla Finance argued that the commercial suit should be barred, as the dispute falls within DRT’s scope, particularly after the secured asset recovery process was triggered due to a default in repayment.
Allegations of Fraud and Collusion
The case involves Shashikant Gangar, a shareholder in Libox Chem (India) Pvt. Ltd., who filed a commercial suit alleging that loans were fraudulently secured by other shareholders, in collusion with Aditya Birla Finance, to misappropriate the company’s assets. Gangar’s plaint argued that these loans were unauthorized and were used for personal benefit rather than for the company’s legitimate needs, alleging fraud in the loan and mortgage arrangement. The petitioner also claimed that the commercial suit’s purpose was to nullify the loan and mortgage agreements through the relief sought under the Specific Relief Act, not covered under SARFAESI.
High Court’s Ruling
In October, Justice Bharat P. Deshpande of the Bombay High Court ruled that fraud allegations allow an exception to the Section 34 jurisdictional bar, referencing the 2021 Bombay High Court decision in Bank of Baroda v. Gopal Shriram Panda. The Court emphasized that when fraud is specifically alleged, civil courts can retain jurisdiction, as such matters fall beyond DRT’s purview. The High Court noted that the plaintiff’s claims contained specific allegations detailing instances of fraud and collusion between the bank and other directors, making the suit maintainable in a civil forum.
Supreme Court’s Interim Stay
Aditya Birla Finance contested the High Court’s decision, asserting that the SARFAESI Act’s provisions supersede the High Court’s ruling when recovery mechanisms are already in progress. The company argued that the DRT had exclusive jurisdiction once SARFAESI proceedings were initiated. Senior Advocate Atmaram NS Nadkarni, representing Aditya Birla Finance, contended that allowing civil jurisdiction would undermine the SARFAESI Act’s intent to streamline asset recovery by secured creditors.
In response, the Supreme Court stayed the Commercial Court proceedings and issued notice to the respondents. This stay effectively halts the commercial suit, pending the Supreme Court’s final decision on the maintainability of the fraud claims within civil court jurisdiction despite SARFAESI’s jurisdictional restrictions.
Case Details
Aditya Birla Finance Ltd. v. Shashikant Gangar & Ors.: SLP Number: 26357/2024
This case underscores ongoing judicial examination of the SARFAESI Act’s scope, particularly when fraud allegations intersect with financial disputes governed by DRT jurisdiction.
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