The Madras High Court has clarified that once a financial institution transfers a loan account to an asset reconstruction company under the SARFAESI Act, the original lender ceases to be a proper party to any civil suit alleging interference with property. The judgment reinforces the statutory exclusivity of remedies under the SARFAESI Act and shuts the door on misuse of civil courts to stall secured creditor enforcement.
Background & Facts
The Dispute
The plaintiff, M/s. Aptus Drums and Containers, borrowed Rs. 20 lakh under an OLCC scheme and Rs. 47 lakh under an OSL term loan from City Union Bank, both secured by mortgage on a commercial property. Despite repaying Rs. 41.85 lakh by November 2013, the bank classified the remaining dues as non-performing and initiated proceedings under the SARFAESI Act. On May 20, 2014, the bank transferred the loan account to M/s. Reliance Asset Reconstruction Company Limited. The plaintiff, aware of this transfer, filed a civil suit seeking permanent injunction against the bank, alleging harassment by recovery agents, threats to vacate the property, and attempts to sell it to a third party.
Procedural History
- February 28, 2012: Loans sanctioned by City Union Bank
- March 21, 2014: Bank issued Section 13(2) notice under SARFAESI Act
- May 19, 2014: Loan transferred to Reliance Asset Reconstruction Company Limited via Assignment Agreement
- 2018: Plaintiff filed O.S. No. 3556 seeking permanent injunction against City Union Bank
- March 19, 2020: Trial Court dismissed Defendant’s I.A. No. 3 of 2019 under Order VII Rule 11 CPC
- 2021: City Union Bank filed C.R.P. No. 771 of 2021 under Article 227
- February 24, 2026: Madras High Court allowed the revision petition
Relief Sought
The petitioner sought to set aside the Trial Court’s order dismissing its application to reject the plaint under Order VII Rule 11(d) CPC and to have the plaint struck down as disclosing no cause of action.
The Legal Issue
The central question was whether a civil suit for injunction against a financial institution is maintainable after the loan account has been transferred to an asset reconstruction company under the SARFAESI Act, and whether the plaintiff’s allegations against the original lender constitute a cause of action when statutory remedies are available.
Arguments Presented
For the Petitioner
The petitioner argued that the plaint was an abuse of process, as the plaintiff had admitted in the pleadings that the loan was transferred to Reliance Asset Reconstruction Company Limited. The petitioner relied on Section 34 of the SARFAESI Act, which bars civil courts from entertaining suits relating to enforcement of security interest. Counsel contended that the plaintiff’s allegations of harassment and threats were speculative and designed to delay SARFAESI proceedings. The suit was not against the current secured creditor but against a party with no legal interest in the asset post-transfer.
For the Respondent
The respondent did not appear or file any written submissions, leaving the court to evaluate the plaint on its face and the petitioner’s contentions.
The Court's Analysis
The Court examined the plaint and found that the plaintiff had explicitly acknowledged the transfer of the loan account to Reliance Asset Reconstruction Company Limited. The Court held that Section 34 of the SARFAESI Act creates an exclusive remedy for disputes arising from enforcement of security interest, and civil courts are expressly barred from entertaining such matters. The Court observed:
"The Plaintiff has no cause of action against the Defendant after the loan account was transferred and symbolic possession was taken by the ARC. Any grievance regarding the SARFAESI proceedings must be raised before the DRT or the Authority under the Act, not before a Civil Court."
The Court further noted that the plaintiff’s allegations of threats and property alienation were not substantiated by any documentary evidence and appeared to be conjectural. The Trial Court’s failure to consider Section 34 and the implications of the transfer rendered its order unsustainable. The Court emphasized that Order VII Rule 11 CPC permits rejection of a plaint if it discloses no cause of action or is barred by law. Here, both conditions were met.
The Verdict
The petitioner won. The Madras High Court held that Section 34 of the SARFAESI Act bars civil suits against original lenders after loan transfer to an asset reconstruction company, and the plaint disclosed no maintainable cause of action. The Trial Court’s order dismissing the application under Order VII Rule 11 CPC was set aside, and the plaint was rejected.
What This Means For Similar Cases
Civil Suits Against Original Lenders Are Not Maintainable Post-Transfer
- Practitioners must immediately challenge any civil suit filed against a bank or financial institution after loan assignment under SARFAESI Act
- File applications under Order VII Rule 11 CPC at the earliest stage to have plaint rejected
- Cite Section 34 SARFAESI Act as a complete bar to civil jurisdiction
Allegations of Harassment Must Be Supported by Evidence
- Vague claims of "threats" or "goondas" without affidavits, FIRs, or photographs will not sustain a cause of action
- Courts will dismiss such pleadings as speculative under Order VII Rule 11 CPC
- Always demand corroboration for allegations of intimidation
SARFAESI Remedies Are Exclusive and Pre-Emptive
- Debt recovery forums (DRT, DRAT) are the only competent authorities for disputes arising from security enforcement
- Civil courts cannot be used as a tactical tool to delay SARFAESI proceedings
- Any attempt to circumvent statutory forums will be viewed as abuse of process
