Statutory Notice Under Section 164 of MCS Act is Mandatory for Recovery-Related Damages Suits Against Co-operative Banks

The Petitioner Bank, a multi-state co-operative society, auctioned secured assets under the SARFAESI Act, 2002, following a loan default by a third-party company.

The Respondent was the successful auction purchaser. After the execution of the sale deed and transfer of possession, the Respondent filed Special Civil Suit No. 01 of 2012 seeking damages of Rs. 1,00,00,000/- for alleged delays in possession, project cost escalation, and tax liabilities.

The Petitioners filed an application under Order VII Rule 11(d) of the CPC for rejection of the plaint, arguing that the suit was barred by Section 34 of the SARFAESI Act and for failure to serve mandatory notice under Section 164 of the Maharashtra Co-operative Societies (MCS) Act, 1960.

The Trial Court rejected the application on September 27, 2016, leading to this Writ Petition.

1. Whether a civil suit for damages filed by an auction purchaser (not a borrower) is barred by Section 34 of the SARFAESI Act.

2. Whether the dispute regarding the auction and recovery process constitutes an act "touching the business of the society," thereby requiring mandatory notice under Section 164 of the MCS Act, 1960.

Section 164 of the MCS Act, 1960, which mandates a two-month prior written notice to the Registrar before instituting any suit against a society regarding acts "touching the business of the society".

The doctrine that "touching the business" is of wide import and includes the recovery of loans through the sale of mortgaged property, as established in Suprabhat Co-operative Housing Society Ltd. v. Span Builders and Devgiri Nagri Sahakari Bank Ltd. v. Jubidabegum.

Section 34 of the SARFAESI Act, which bars civil courts from entertaining matters that the Debt Recovery Tribunal (DRT) is empowered to determine.

Section 19 of the SARFAESI Act, which provides compensation remedies specifically for "borrowers".

The Court observed that while Section 34 of the SARFAESI Act generally bars civil court jurisdiction, the Respondent, as an auction purchaser, does not have a statutory remedy for damages under Section 19 of the SARFAESI Act, which is reserved for borrowers; thus, the civil suit was not barred by Section 34.

The Court reasoned that the Bank’s core business involves advancing and recovering loans. Since the claim for damages arose directly from the auction and recovery process of secured assets, it sizeably falls within the ambit of acts "touching the business of the society".

Compliance with the notice under Section 164 of the MCS Act is a mandatory condition precedent. The Court found that the Respondent admittedly failed to serve this notice, making the suit technically non-maintainable at the threshold.

The High Court allowed the Writ Petition, set aside the Trial Court’s order, allowed the application under Order VII Rule 11(d), and rejected the plaint in Special Civil Suit No. 01 of 2012 with liberty to the Respondent to file a fresh suit after complying with Section 164 of the MCS Act.