IFCI Limited Vs Hotel Mythri (Kerala High Court)
Lessee Cannot Knock at Civil Court After Losing Before DRT: Kerala High Court Terms Suit an Abuse of Process
The Kerala High Court has held that a lessee claiming rights under a lease created after the mortgage cannot institute a civil suit to restrain the secured creditor from proceeding under the SARFAESI Act, particularly after the lessee has already invoked the remedy before the Debt Recovery Tribunal and suffered an adverse order. The Court held that such a suit was barred by the SARFAESI Act, hit by the principles of res judicata and amounted to an abuse of the process of law.
IFCI Limited was the secured creditor holding a mortgage over the property concerned. During the subsistence of the mortgage, the mortgagor executed a registered lease deed in favour of Hotel Mythri for a period of nine years. When IFCI initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the lessee approached the Debt Recovery Tribunal-II, Ernakulam, by filing S.A. No. 174 of 2020.
The DRT considered the lessee’s claim but dismissed the securitisation application on 5 December 2024. Notwithstanding the adverse order, the lessee thereafter instituted O.S. No. 11 of 2025 before the Sub Court, Nedumangad, seeking a prohibitory injunction restraining IFCI from taking further measures under the SARFAESI Act and from evicting it from the secured asset by invoking Section 14.
IFCI filed an application under Order VII Rule 11 of the Code of Civil Procedure seeking rejection of the plaint. The Trial Court, however, dismissed the application. It reasoned that the lease deed was executed on 6 December 2017 and the mortgage deed did not contain any express clause prohibiting the borrower from granting a lease in favour of third parties. Therefore, according to the Trial Court, the lessee was entitled to maintain the civil suit.
The Kerala High Court found this reasoning fundamentally erroneous. The absence of an express prohibition in the mortgage deed did not mean that the mortgagor possessed an unrestricted power to grant any lease. The mortgagor’s statutory authority to lease mortgaged property is governed by Section 65A of the Transfer of Property Act, 1882.
Section 65A permits a mortgagor who remains lawfully in possession to create leases which may bind the mortgagee, but only if the conditions prescribed in the provision are satisfied. The lease must be executed in the ordinary course of management, reserve the best rent reasonably obtainable, involve no premium or advance rent, contain no covenant for renewal and take effect within six months of execution. Most importantly, in the case of a building, the duration of the lease cannot ordinarily exceed three years, unless the terms have been varied or extended by the mortgage deed.
In the present case, the lease had been granted for nine years, substantially exceeding the three-year period contemplated by Section 65A. The High Court therefore held that even though the mortgage deed did not expressly prohibit the creation of a lease, a lease made contrary to Section 65A would not bind the mortgagee. This was precisely the conclusion already reached by the DRT while dismissing the lessee’s securitisation application.
The Trial Court had relied upon the Supreme Court’s decision in Harshad Govardhan Sondagar v. International Assets Reconstruction Company, apparently proceeding on the basis that the SARFAESI Act did not provide an adequate remedy for tenants or lessees. The High Court expressed surprise at this approach because the Trial Court had overlooked the statutory amendment made in 2016.
By the 2016 amendment, Section 17(4A) was specifically inserted in the SARFAESI Act to enable a tenant or lessee to raise objections before the DRT against measures taken by a secured creditor. The Tribunal is empowered to examine whether the lease has expired, is contrary to Section 65A of the Transfer of Property Act, is contrary to the terms of the mortgage or was created after issuance of the demand notice under Section 13(2). Thus, a specific statutory remedy was available to the lessee.
The Court also referred to the Supreme Court’s ruling in Bajarang Shyamsunder Agarwal v. Central Bank of India, wherein it was held that a tenancy created after the mortgage but before issuance of notice under Section 13(2) must satisfy the requirements of Section 65A of the Transfer of Property Act if it is to bind the secured creditor.
The High Court found a further and more serious infirmity in the civil suit. The lessee had already invoked Section 17(4A), placed its leasehold claim before the DRT and suffered an adverse order. After failing before the competent statutory forum, it could not initiate a civil suit seeking substantially the same protection against the secured creditor. The suit was therefore not merely barred by the special statutory mechanism but was also barred by the principle of res judicata.
The Court held that the Trial Court was completely remiss in failing to appreciate the maintainability issue in its correct legal perspective. When a statute such as the SARFAESI Act provides a specific remedy to tenants under Section 17(4A), Civil Courts must be slow to entertain suits seeking injunctions against secured creditors. The effect of entertaining such suits would be to frustrate the special recovery mechanism enacted by Parliament.
The High Court was particularly critical of the Trial Court for relying on the legal position existing prior to the 2016 amendment and for ignoring both the DRT’s order and binding decisions of the High Court and Supreme Court. It described the approach as “nothing short of judicial impropriety.” Nevertheless, considering the circumstances, the Court refrained from making further observations concerning the conduct of the proceedings before the Sub Court.
Accordingly, the High Court allowed IFCI’s petition and set aside the order of the Sub Court. The application under Order VII Rule 11 was allowed, O.S. No. 11 of 2025 was declared not maintainable, and all further proceedings in the suit were terminated forthwith.
Author’s Comments
The judgment establishes that a lease created after the mortgage is not automatically binding on the secured creditor merely because the mortgage deed does not expressly prohibit leasing. The lease must independently satisfy Section 65A of the Transfer of Property Act. For a building, a nine-year lease would ordinarily fail the statutory three-year limitation unless the mortgage deed validly permits an extended term.
The ruling also highlights the importance of Section 17(4A), inserted after the decision in Harshad Govardhan Sondagar. Tenant and leasehold claims are now specifically examinable by the DRT. Once that remedy has been invoked and decided, a civil suit cannot be used as a second round of litigation to obtain an injunction against the secured creditor. A statutory remedy cannot be pursued before the DRT and, after failure, repackaged as an independent civil action.
Cases Discussed
- Harshad Govardhan Sondagar v. International Assets Reconstruction Company (Supreme Court of India), [2014 KHC 4229]
- Bajarang Shyamsunder Agarwal v. Central Bank of India (Supreme Court of India), [(2019) (9) SCC 94]
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The secured creditor in a suit filed by a lessee subsequent to the creation of the mortgage has come up with this present original petition being aggrieved by the order rejecting an application under Order 7 Rule 11 of the Code of Civil Procedure.
2. The brief facts necessary for the disposal of the appeal are as follows:-
The petitioners are the secured creditor, holding a mortgage over the property of 2nd and 3rd respondents. During the pendency of the mortgage, the 2nd respondent entered into a lease agreement with the 1st respondent by a registered lease deed, which created an interest in favour of the 1st respondent for a period of nine years, which is contrary to the provisions of Section 65A of the Transfer of Property Act,1882. When faced with the Securitization proceedings, the 1st respondent preferred S.A No.174/2020 before the Debt Recovery Tribunal-II, Ernakulam, which was dismissed on 05.12.2024. Notwithstanding the dismissal of S.A No.174/2020, the 1st respondent proceeded to file a suit as O.S No.11/2025 before the Sub Court, Nedumangad, seeking a prohibitory injunction restraining the secured creditor from initiating further measures under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (for short ‘SARFAESI Act’) and that restrained them from evicting the plaintiff from the secured asset by taking recourse to Section 14 of the SARFAESI Act. In the suit, the petitioners filed an application under Order 7 Rule 11 of the Code of Civil Procedure, 1908, as I.A No.5/2025, which was directed to be considered in O.P.(C) No.889/2025, by this Court.
In pursuance of the said direction, Ext.P6 order has been passed holding that the lease agreement was executed on 06.12.2017 and the mortgage deed executed by the borrower / respondents 2 and 3 did not contain a clause prohibiting them from creating a lease in favour of third parties. Accordingly, the application was dismissed and hence the original petition.
3. Heard Shri.D.Reetha, the learned counsel appearing for the petitioners and Shri.Thejan Raj, the learned counsel appearing for the 2nd respondent. None appeared for the 1st respondent.
4. On an anxious consideration of the submissions raised across the Bar and after perusing the impugned order, this Court is of the view that the trial court was completely remiss in not comprehending the issue regarding the maintainability of the suit in its correct perspective. This Court is completely at a loss to understand how the trial court could have declined the application under order 7 Rule 11 of the Code of Civil Procedure, 1908, especially when the remedy of the lessee is under Section 17(4A) of the SARFAESI Act, before the Debt Recovery Tribunal.
5. It is pertinent to note that the 1st respondent / plaintiff had, in fact, invoked the jurisdiction of the Tribunal under Section 17(4)A and had filed S.A No.174/2020, which was dismissed on 05.12.2024. Therefore, the filing of the suit is clearly an abuse of process of law, which the trial court has completely ignored, notwithstanding the settled law laid down by this Court as well as by the Supreme Court, and proceeded to entertain the suit.
6. A perusal of the impugned order shows that the trial court rejected the application filed by the petitioners on the ground that mortgage deed did not contain a clause by which the borrower has been prohibited from creating a lease. Hence, the lessee is entitled to maintain the suit.
7. The basic infirmity in the above finding stems from the failure of the trial court to comprehend the impact of Section 65A of the Transfer of Property Act, 1882. Section 65A provides that a mortgagor in possession is empowered to grant a lease only in accordance with the provisions thereof.
Section 65 A -65A. Mortgagor’s power to lease
(1) Subject to the provisions of sub-section (2), a mortgagor, while lawfully in possession of the mortgaged property, shall have power to make leases thereof which shall be binding on the mortgagee.
(2) (a) Every such lease shall be such as would be made in the ordinary course of management of the property concerned, and in accordance with any local law, custom or usage.
(b) Every such lease shall reserve the best rent that can reasonably be obtained, and no premium shall be paid or promised and no rent shall be payable in advance.
(c) No such lease shall contain a covenant for renewal.
(d) Every such lease shall take effect from a date not later than six months from the date on which it is made.
(e) In the case of a lease of buildings, whether leased with or without the land on which they stand, the duration of the lease shall in no case exceed three years, and the lease shall contain a covenant for payment of the rent and a condition of re-entry on the rent not being paid with a time therein specified.
(3) The provisions of sub-section (1) apply only if and as far as a contrary intention is not expressed in the mortgage-deed; and the provisions of sub-section (2) may be varied or extended by the mortgage-deed and, as so varied and extended, shall, as far as may be, operate in like manner and with all like incidents, effects and consequences, as if such variations or extensions were contained in that sub-section.
Once the lease by a mortgagor in possession of the mortgage property is governed by the provisions of Section 65A, even if the mortgage deed does not contain a clause prohibiting the borrower from creating a further interest in the mortgaged property, a lease in contravention of Section 65A of the Transfer of Property Act, 1882 is not binding upon the mortgagee. It is exactly what the Debt Recovery Tribunal has held in the order passed in S.A No.174/2020.
8. The trial court, on the other hand, proceeded to hold that there is no provision under SARFAESI Act, 2002 to protect the interests of the lessee. In doing so, relied on the decision of Harshad Govardhan Sondagar Vs International Asset Reconstruction Company [2014 KHC 4229].
9. It is surprising to note that the trial court failed to note that the provisions of the SARFAESI Act, 2002, were amended in 2016 and Section 17(4A) was incorporated for the benefit of tenants to raise their grievances before the Tribunal against the actions of the secured creditor over the leasehold properties.
10. That apart, the Supreme Court in Bajarang Shyamsunder Agarwal Vs Central bank of India [(2019) (9) SCC 94] held that if a tenancy under law comes into existence after the creation of a mortgage but prior to the issuance of notice under Section 13(2), it has to satisfy the conditions under Section 65A of the Transfer of Property Act, 1882.
11. That apart, when the lessee had invoked the jurisdiction of the Tribunal and had obtained an adverse order, it was completely impermissible for the trial court to have entertained the suit. Therefore, the irresistible conclusion is that the filing of a suit was clearly an abuse of the process of law and hit by Section 35 of the SARFAESI Act and also barred by the principles of res judicata, in view of the dismissal of S.A. No.174/2020.
12. In the above circumstances, the petitioners were fully justified in moving an application under Order 7 Rule 11 of the Code of Civil Procedure, 1908. Unfortunately, the Sub Court could not comprehend the position of law in its correct perspective. It is unfortunate to note that, even though the provision of law is explicit and avenues are available for the lessee to redress their grievance, the trial court proceeds to rely on an unamended provision to hold otherwise. This is nothing short of judicial impropriety.
13. Before parting with the case, this Court would like to add a note of caution. When a statute like the SARFAESI Act, envisages a case where the remedy available to a tenant is provided under Section 17(4A) of the SARFAESI Act, the trial court should be slow to entertain such a suit and pass an injunction against the secured creditor. In the present case, when the order of the Tribunal was mentioned in the application, this Court is completely at loss, as to how the trial court could ignore the orders passed by the Tribunal and proceed to dismiss the application. Even otherwise, the decision of this court as well as the Supreme Court being binding on the subordinate court, the trial court could not have held otherwise. In the peculiar facts and circumstances, this Court refrains from commending further on the conduct of the proceedings by the Sub Court.
In the above circumstances, this Court is of the view that Ext.P6 order cannot be sustained. Accordingly, this original petition is allowed by setting aside Ext.P6 order. Consequently, I.A No.5/2025 in O.S No.11/2025 on the files of Sub Court, Nedumangad, will stand allowed. It is declared that O.S No.11/2025 is not maintainable. All further proceedings in the suit stand terminated forthwith.
