Emphasising that writ jurisdiction cannot be used to enforce contractual rights or to seek immunity from contractual default liabilities, the Madras High Court has held that a secured creditor’s statutory enforcement powers under the SARFAESI Act are exercisable only against the security interest created by the borrower. Where the security interest is a mortgage of leasehold rights, such mortgage remains subject to the underlying terms, conditions, and forfeiture clauses of the primary lease deed.
The Court also held that SARFAESI Act does not override the primary lessor’s contractual right of re-entry for gross breach of lease terms. A secured creditor stepping into the shoes of the borrower/lessee cannot claim rights superior to those of the original lessee, and cannot invoke the extraordinary writ jurisdiction under Article 226 to resolve what is essentially a contractual dispute between the lessor and the lessee.
The Division Bench comprising the Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan observed that it is a fundamental principle of public law that the extraordinary remedy under Article 226 of the Constitution cannot be turned into a forum for resolving pure contractual disputes. The relationship between SIPCOT and the original lessee (ABC Apparels) is governed purely by the terms of the registered lease deed. The cancellation of allotment and resumption of land are actions rooted directly in contractual terms, and the petitioner bank cannot invoke writ jurisdiction to enforce contractual rights or seek immunity from contractual default liabilities.
The Court applied the principle of Nemo dat quod non habet, i.e., an assignee steps precisely into the shoes of the original assignor and can claim no higher or better title than what the assignor possessed. The original lessee was bound by Clause 17 of the Lease Deed, which mandated that the allottee shall commence commercial production or trial production within 30 months from the date of the allotment order, failing which the allotment would be cancelled and the amount paid towards the extent allowed would be forfeited. The Court held that the petitioner bank cannot claim immunity from these binding clauses in the lease deed.
The Court further observed that the petitioner’s reliance on Section 13(4) of the SARFAESI Act is fundamentally misplaced. The enforcement powers of a secured creditor under the SARFAESI Act are exercisable only against the security interest created by the borrower. Where the security interest is merely a mortgage of leasehold rights, such mortgage remains intrinsically subject to the underlying terms, conditions, and forfeiture clauses of the primary lease deed. Statutory enforcement measures under the SARFAESI Act do not override the primary lessor’s contractual right of re-entry for gross breach of lease terms.
The Court also noted that industrial plots allotted by State developmental agencies like SIPCOT are public resources meant to generate employment, foster industrialization, and boost the regional economy. Allowing a commercial lender or asset reconstruction company to lock up prime public industrial land indefinitely, while failing to find a buyer for nearly a decade, grossly subverts public interest. SIPCOT cannot be restrained from re-allotting unutilized public land to genuine entrepreneurs.
Briefly, SIPCOT (State Industries Promotion Corporation of Tamil Nadu Limited) developed an industrial park at Irungattukottai and allotted a plot to ABC Apparels Private Limited. This plot was leased to ABC Apparels for a period of 99 years under a registered lease deed. ABC Apparels subsequently approached Karur Vysya Bank seeking financial assistance and offered to create an equitable mortgage over its leasehold rights as collateral security. SIPCOT granted its consent for this arrangement, pursuant to which, a memorandum of deposit of title deeds was registered before the Sub-Registrar’s Office, Sriperambadur. Based on the mortgage so created, the bank sanctioned an overdraft cash credit facility of Rs. 10 crores to ABC Apparels.
ABC Apparels defaulted in repayment of the financial facilities extended by the bank. The bank classified the borrower’s account as a Non-Performing Asset (NPA) on Nov 03, 2022. A notice under Section 13(2) of the SARFAESI Act, 2002, was issued on Dec 30, 2022, and thereafter, on March 16, 2023, the bank took symbolic possession of the secured asset under Section 13(4) of the SARFAESI Act. The bank subsequently issued an e-auction sale notice notifying the sale of the property for recovery of the secured debt.
Meanwhile, SIPCOT alleged that the lessee had breached the terms of the allotment letter and the lease deed. SIPCOT also questioned the symbolic possession taken by the bank under the SARFAESI Act. Subsequently, SIPCOT issued the impugned cancellation order, cancelling the allotment of the plot made in favour of ABC Apparels and directing execution of a surrender deed. Challenging this cancellation order, Karur Vysya Bank filed the present petition seeking to quash the cancellation order and to direct SIPCOT to cooperate with the bank in selling the property for recovery of the secured debt.
