Allahabad High Court Quashes Cooperative Society’s Order Against Bank in Loan Recovery Dispute

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Case Name

Union Bank of India vs. M/s D.V. Poultry Farm Thru Prop. Mr. Dharamvir Sharma and Others (High Court of Allahabad)

Writ C.No. 3820 of 2019

Date: 20th December 2023

Key Takeaways

• Jurisdiction Limits: Cooperative society authorities (under Section 70 (of Income Tax Act, 1961) of the U.P. Co-operative Societies Act, 1965) cannot adjudicate disputes involving banks that are not members of the society, especially regarding loan recovery and property auctions under the SARFAESI Act, 2002.
• SARFAESI Act Prevails: The SARFAESI Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993, provide special mechanisms for banks to recover debts, and these override other laws in case of inconsistency (Sections 35 and 37 of SARFAESI Act).
• No NOC Required for Auction: Once a No Objection Certificate (NOC) is granted for mortgaging a property, further NOC is not required for auctioning the property in case of default.
• Alternative Remedies: The borrower had already availed remedies under the SARFAESI Act and DRT, and the society’s application under Section 70 (of Income Tax Act, 1961) was not maintainable against the bank.

Issue

Did the cooperative society authority (respondent no. 3) have the jurisdiction to direct the bank to release mortgaged property to the borrower under Section 70 (of Income Tax Act, 1961) of the U.P. Co-operative Societies Act, 1965, after the bank had already initiated recovery and auction proceedings under the SARFAESI Act, 2002?

Facts

• Parties:
• Petitioner: Union Bank of India
• Respondent No. 1: M/s D.V. Poultry Farm (proprietor: Mr. Dharamvir Sharma)
• Respondent No. 2: Air Force Hindon Cooperative Housing Society Limited
• Respondent No. 3: Mediator/Assistant Housing Commissioner/Assistant Registrar, Avas and Vikas Parishad
• Timeline & Events:

1. Mr. Sharma bought a plot (C-120) from the cooperative society and mortgaged it to the bank for loans totaling over Rs. 1.6 crore for his poultry business.
2. Mr. Sharma defaulted on the loan; the account was declared a Non-Performing Asset (NPA) in 2014.
3. The bank issued a demand notice under Section 13(2) of the SARFAESI Act, 2002, and took symbolic possession of the property in 2015.
4. The bank filed for recovery before the Debts Recovery Tribunal (DRT) and obtained an order for physical possession of the property.
5. The property was auctioned after failed attempts, and the highest bidder purchased it.
6. Meanwhile, the cooperative society filed an application under Section 70 (of Income Tax Act, 1961) of the U.P. Co-operative Societies Act, 1965, seeking to direct the bank to release the property to Mr. Sharma.
7. The Assistant Registrar (respondent no. 3) passed an order in favor of the society and Mr. Sharma, directing the bank to release the property.
8. The bank challenged this order in the High Court.

Arguments

Bank’s Arguments:

• The Assistant Registrar had no jurisdiction under Section 70 (of Income Tax Act, 1961) of the U.P. Co-operative Societies Act, 1965, to pass orders against the bank, which is not a member of the society.
• The SARFAESI Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993, provide special mechanisms for debt recovery, and Section 34 of the SARFAESI Act bars other authorities from interfering in such matters.
• The borrower had already availed remedies under the SARFAESI Act and DRT, and lost; the property was lawfully auctioned.

Society’s and Borrower’s Arguments:

• The bank auctioned the property without obtaining a fresh NOC from the society.
• The bank allegedly auctioned more land than was mortgaged and at a value below the real price.
• The bank had an alternative remedy to appeal under Section 98 (of Income Tax Act, 1961) of the U.P. Co-operative Societies Act, 1965.
• Arbitration or mediation could be initiated at any stage for amicable settlement.

Key Legal Precedents

• M/s M.D. Frozen Foods Exports Pvt Limited vs. Hero Fin Corp. Limited (2017 (16) SCC 741):
• Held that SARFAESI Act and arbitration proceedings can go hand in hand, but the choice of remedy depends on the parties’ agreement. The SARFAESI Act is an additional remedy, not an exclusive one.
• Transcore v. Union of India (2008) 1 SCC 125:
• Clarified that SARFAESI Act and RDDB Act are complementary, and the doctrine of election does not apply as they are not inconsistent remedies.
• Section 34 (of Income Tax Act, 1961), 35 (of Income Tax Act, 1961), and 37 of the SARFAESI Act, 2002:
• Section 34 (of Income Tax Act, 1961) bars civil courts from entertaining matters under SARFAESI.
• Section 35 (of Income Tax Act, 1961) gives SARFAESI overriding effect over other laws.
• Section 37 (of Income Tax Act, 1961) clarifies that SARFAESI is in addition to, not in derogation of, other laws.
• Sections 70 and 71 of the U.P. Co-operative Societies Act, 1965:
• Deal with disputes between society members and the society, not with outsiders like banks.

Judgement

• Decision: The High Court allowed the bank’s writ petition and quashed the order of the Assistant Registrar (respondent no. 3) as it was without jurisdiction.
• Reasoning:
• The dispute was not between society members or between the society and its members, but between the bank (an outsider) and the borrower.
• The bank had lawfully proceeded under the SARFAESI Act, and the cooperative society authority had no power to intervene or direct the bank regarding the mortgaged property.
• The NOC for mortgage was already granted, and no further NOC was required for auction.
• The borrower had already availed remedies under the SARFAESI Act and DRT, and the society’s application under Section 70 (of Income Tax Act, 1961) was not maintainable against the bank.
• Order: The impugned order dated 23.10.2018 was quashed as far as it directed the bank, and the writ petition was allowed.

FAQs

Q1: Can a cooperative society authority direct a bank to release mortgaged property to a borrower?

A: No, if the bank is not a member of the society and the dispute is about loan recovery under the SARFAESI Act, the cooperative society authority has no jurisdiction.

Q2: Is a fresh NOC from the society required for auctioning mortgaged property?

A: No, once an NOC is granted for mortgage, all legal consequences, including auction in case of default, follow automatically.

Q3: Can SARFAESI Act and arbitration proceedings run simultaneously?

A: Yes, but only if both parties have agreed to arbitration. In this case, the borrower chose the SARFAESI route, not arbitration.

Q4: What is the significance of Section 34 of the SARFAESI Act?

A: It bars civil courts and other authorities from interfering in matters covered by the SARFAESI Act, ensuring that only designated tribunals handle such disputes.

Q5: What happens if a borrower loses in DRT and DRAT?

A: The borrower cannot seek relief from cooperative society authorities for the same dispute; the proper forum is the DRT/DRAT or as provided under the SARFAESI Act.