DRAT Mumbai Rules SARFAESI Proceedings Invalid for Debts Previously Rejected under Co-operative Societies Act
In a significant ruling concerning the interplay between statutory recovery mechanisms and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Debts Recovery Appellate Tribunal (DRAT), Mumbai has set a crucial precedent. The Tribunal held that a financial institution is precluded from initiating proceedings under the SARFAESI Act for a specific debt if a competent authority under the Co-operative Societies Act has already adjudicated and rejected the claim for the same debt.
The judgment was delivered in the case of Perfect Foundation & Construction Company Vs Saraswat Co-operative Bank Ltd, emphasizing that the determination of debt through an adjudicatory process takes precedence over non-adjudicatory enforcement measures.
Factual Matrix of the Dispute
The controversy arose from an appeal filed under Section 18 of the SARFAESI Act, challenging the order passed by the Debts Recovery Tribunal-II (DRT-II), Mumbai. The Appellants sought to quash the symbolic possession notice dated December 14, 2010, and subsequent measures taken by the Respondent Bank.
The Initial Recovery Attempt
The historical context of the dispute is pivotal. The Respondent, Saraswat Co-operative Bank Ltd (formerly South Indian Co-operative Bank Ltd), had initially sought recovery of an alleged sum of Rs. 83,36,854.66p. To effect this recovery, the Bank filed Recovery Application No. 3441/2004 before the Assistant Registrar under Section 101 of the Maharashtra Co-operative Societies Act, 1960.
Upon reviewing the documentation and the timeline of the alleged loan, the Learned Assistant Registrar issued an order on February 21, 2007, rejecting the Bank's claim. The rejection was based on substantial discrepancies, notably that the Loan Demand Application was dated October 18, 1999, whereas the Loan Sanction Letter was dated June 8, 1999—a chronological impossibility that cast doubt on the genuineness of the transaction.
Subsequent Litigation and SARFAESI Action
Aggrieved by the rejection, the Bank filed Revision Petition No. 193/2007 before the Divisional Joint Registrar. However, this revision petition was eventually dismissed for non-prosecution. Consequently, the order of the Assistant Registrar rejecting the debt claim attained finality.
Despite this outcome, the Respondent Bank later initiated measures under the SARFAESI Act for the same underlying transaction, issuing a Demand Notice. The Appellants challenged this action, arguing that the debt had already been declared non-existent by a competent forum, and thus, the SARFAESI proceedings were barred by the principles of limitation and res judicata.