Debt Claim Rejected under Co-op Act Bars SARFAESI Measures: DRAT [Read Order]
It was also noted that pending proceedings were not affected by the conversion of a society into a multi-state co-operative
The Debts Recovery Appellate Tribunal (DRAT), Mumbai bench, has held that once a debt claim is rejected under the Maharashtra Co-operative Societies Act, 1960, it cannot be invoked under the SARFAESI Act, 2002.
The case arose when the South Indian Co-operative Bank, later merged with Saraswat Bank, the respondent, filed a Recovery Application before the Assistant Registrar of Co-operative Societies seeking recovery of over ₹83 lakh from Perfect Foundation, the appellant.
The Assistant Registrar, after examining the documents, rejected the claim. A revision petition filed before the Divisional Joint Registrar was also dismissed for non-prosecution in 2007. No further proceedings were pursued by the Bank at that stage.
Despite this, the Bank issued a demand notice under Section 13(2) of the SARFAESI Act in August 2010, claiming ₹1.36 crore. The borrowers objected, arguing that once the competent co-operative authorities had rejected the claim, there was no legally recoverable debt, and hence SARFAESI proceedings could not be initiated.
They also pointed out defects in the demand notice, including the absence of details on NPA classification and failure to segregate principal and interest. This was in contrary to Section 13(3) of the Act. The DRT, however, dismissed their securitisation application in 2024. This led to the present appeal.
In appeal, the borrowers emphasised that criminal cases under Section 138 of the Negotiable Instruments Act, arising from dishonoured cheques, had been separately settled, but those settlements were expressly limited to cheque dishonour and did not amount to admission of loan liability.
They also highlighted that letters written by the borrower’s son offering settlement were marked “without prejudice” and could not be treated as an admission of debt.
The Bank, on the other hand, argued that the borrowers had admitted liability by negotiating settlements and offering payments. It was contended that the merger of the South Indian Co-operative Bank into Saraswat Bank meant that the Maharashtra Co-operative Societies Act did not apply.
The bench of G Chandrasekharan (Chairperson) rejected the Bank’s arguments. It noted that adjudicatory proceedings under the Co-operative Societies Act had already determined against the Bank. it was also observed that once a competent forum had held that no debt was recoverable, SARFAESI measures could not be pursued for the same transaction.
The Tribunal placed its dependence on precedents, including Ace Media Advertisers Pvt. Ltd. v. Bank of Baroda and Jasmin K v. State Bank of India, which held that adjudicatory findings override non-adjudicatory SARFAESI proceedings, and that only legally recoverable debts can be enforced under SARFAESI.
It also cited the Bombay High Court’s ruling in Saraswat Co-op Bank v. National Flank Industries Ltd., which mandated segregation of principal and interest in demand notices—a requirement not met in this case.
The Tribunal further observed that the Bank’s acceptance of a one-time settlement proposal for ₹20 lakh against a claimed liability of ₹1.36 crore showed the weakness of its claim. It held that “without prejudice” letters by the borrower’s son cannot mean an admission of debt, and that settlements in cheque dishonour cases were confined to those proceedings alone.
The argument that the Multi-State Co-operative Societies Act displaced earlier proceedings under the Maharashtra Act was also rejected. It was also noted that pending proceedings were not affected by the conversion of a society into a multi-state co-operative.
In conclusion, the DRAT allowed the appeal, set aside the DRT’s order, and quashed the SARFAESI measures initiated by Saraswat Bank against Perfect Foundation.
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