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Jurisdiction of Civil Court in Civil Suits Filed by Borrowers Against Lender Banks and the RDB Act : Stand explained in the case of Bank Of Rajasthan Ltd v/s VCK Shares And Stock Broking Services Ltd

The present reference arises from a question mark over the legal right of the borrower to initiate proceedings before a Civil Court against the bank or financial institution, which seeks to recover a loan amount against it.

Bank Of Rajasthan Ltd V. Vck Shares & Stock Broking Services Ltd.

(2022 Scc Online Sc 1557)
Bench: Sanjay Kishan Kaul And Abhay S. Oka, Jj.

VCK Shares & Stock Broking Services Ltd. took out a loan of INR 1.50 Crore at an interest rate of 19.25% per year, from the Bank of Rajasthan Ltd. in 1994, secured by a mortgage on the borrower's immovable properties. In 1995, the two parties entered into a further agreement under which VCK Shares received additional credit by pledging shares and securities of various companies. In 1997, the Bank of Rajasthan sent a notice to VCK Shares demanding that the term loan be settled within three days, citing a lack of financial discipline.

The bank subsequently filed a case against VCK Shares under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) in the Debts Recovery Tribunal (DRT) in Kolkata, seeking a recovery certificate for INR 8,62,41,973.36. VCK Shares entered an appearance to defend the case and also filed a civil suit against the bank in the Calcutta High Court.

In 1998, the Bank of Rajasthan sold the pledged shares of BFL Software for a total of INR 5,77,68,000 in order to offset the outstanding debt. In response, VCK Shares filed another civil suit in the HC, seeking a declaration that the sale of the BFL Software shares was void. The bank argued that the High Court lacked jurisdiction to hear the case and that the suits filed by VCK Shares were not maintainable, as the DRT had exclusive jurisdiction in such matters.

On 6th September 2022, a single judge in the High Court ruled in favour of the bank and directed that the suits be taken off the High Court's file. However, on 27th September 2022, a division bench of the High Court overturned the single judge's decision and held that the civil court had jurisdiction to hear the case. The division bench relied on the Supreme Court's decision in Nahar Industrial Enterprises Ltd. v. Hong Kong and Shanghai Banking Corporation,[1] a suit filed by a borrower against the bank was not barred before the Civil Court, although a suit filed by the bank against the borrower was barred.

The Appellant appealed to the Supreme Court.
The Supreme Court noticed a conflicting view on the matter in the cases of Indian Bank vs ABS Marines Product(s) Pvt Ltd[2] and SBI vs Ranjan Chemicals Ltd[3] and ultimately agreed with the decision in the latter case. The Supreme Court concluded that there was a difference of opinion between several benches on this issue and referred the following questions to a larger bench for further consideration:
  1. Whether the jurisdiction of a civil court to entertain a civil suit filed by a borrower against a lender bank was ousted by the RDB Act;
  2. Whether the civil court had jurisdiction to transfer the suit filed by the borrower before it to the DRT; and
  3. Whether the consent of the parties could confer jurisdiction on the civil court to transfer the suit to the DRT?

The larger bench in this case answered the reference as under:
  1. The jurisdiction of a civil court under Section 9 of the Code of Civil Procedure is inherent unless explicitly or implicitly ousted by a statute. The bench cited its previous decisions in Dhulabhai v. State of MP[4] and Dwarka Prashad Agarwal v. Ramesh Chandra Agarwal[5]and concluded that there was nothing in the RDB Act that excluded the jurisdiction of the civil court to entertain a suit filed by a borrower against a bank.

    The bench also noted that the provisions of sections 19(6) and 19(11) of the RDB Act, which relates to set-off and counterclaims, conferred an additional choice on the borrower to submit to the jurisdiction of the DRT. However, the bench stated that these provisions cannot be interpreted as restricting the jurisdiction of the civil court under Section 9.
  2. Answering the second question, the larger bench held that under order 7 rule 10 CPC, all that the civil Court could have done was to return the plaint. There is nothing in the CPC which confers the Civil court with jurisdiction to transfer the case to DRT or any other forum.
  3. Answering the third issue, the larger bench held that the consent of the parties to the suit would be inconsequential and the same could not confer jurisdiction upon the court which inherently lacks it.
  1. (2009) 8 SCC 646
  2. (2006) 5 SCC 72
  3. (2007) 1 SCC 97
  4. (1968) SCR (3) 660
  5. (2003) 6 SCC 220

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