A bench of the Supreme Court comprising Justice J.B. Pardiwala and Justice R. Mahadevan delivered a significant judgment, emphasizing the need for standardized guidelines to ensure thorough verification of title clearance reports by banks before granting loans secured by immovable property. The ruling highlights the critical importance of protecting public interest and preventing fraudulent transactions in secured lending practices.
The case, Central Bank of India & Anr. v. Smt. Prabha Jain & Ors. (Civil Appeal No. 1876 of 2016), underscored the critical role of due diligence in mitigating disputes arising from improper title verification, particularly in the context of loans secured by mortgages.
Background of the Case
The dispute arose when Smt. Prabha Jain filed a civil suit challenging the legality of a sale deed executed by her brother-in-law, Sumer Chand Jain, in favor of a third party, Parmeshwar Das Prajapati. The property was subsequently mortgaged to Central Bank of India as collateral for a loan. Following the borrower’s default, the Bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), to recover the loan.
Smt. Prabha Jain claimed the property was ancestral and argued that the sale and mortgage deeds were invalid. Her suit sought a declaration nullifying these transactions, possession of the property, and damages for wrongful possession. The Bank, however, contested the jurisdiction of the civil court, citing Section 34 of the SARFAESI Act, which bars civil suits in matters under the purview of the Debts Recovery Tribunal (DRT).
Legal Issues
The case raised the following key legal issues:
1. Civil Court Jurisdiction: Whether the suit was barred under Section 34 of the SARFAESI Act, as claimed by the Bank.
2. Validity of Transactions: Whether the sale and mortgage deeds were legally valid.
3. Bank’s Due Diligence: Whether the Bank had conducted adequate due diligence in verifying the title before accepting the property as collateral.
Observations of the Supreme Court
The Supreme Court made several critical observations in the case:
1. Jurisdiction of Civil Courts:
The Court reaffirmed that civil courts retain jurisdiction over disputes concerning property titles and the validity of transactions executed prior to the invocation of the SARFAESI Act. It stated:
“The jurisdiction of the Debts Recovery Tribunal is confined to actions taken under Section 13(4) of the SARFAESI Act. Disputes regarding title or validity of documents, which precede the creditor’s enforcement measures, remain within the domain of civil courts.”
2. Bank’s Due Diligence:
The Court emphasized the need for rigorous title verification processes, stating that banks must not rely solely on title clearance reports without proper scrutiny. It highlighted the importance of implementing standardized practices to prevent disputes and safeguard public interest.
3. Balance Between Expediency and Rights:
The judgment underscored that while the SARFAESI Act aims to expedite debt recovery, it cannot override the rights of innocent third parties with legitimate claims.
Decision of the Court
The Supreme Court upheld the decision of the Madhya Pradesh High Court to restore the suit filed by Smt. Prabha Jain. It rejected the Bank’s application for dismissal of the plaint under Order VII Rule 11 of the Civil Procedure Code, emphasizing that:
– The plaintiff’s claims regarding the validity of the sale and mortgage deeds were outside the DRT’s jurisdiction under the SARFAESI Act.
– Civil courts retain jurisdiction to adjudicate disputes involving title and validity of transactions.
The Court also reiterated that a plaint cannot be partially rejected under Order VII Rule 11, ensuring that all reliefs sought by the plaintiff would be adjudicated upon.
