While upholding Kotak Mahindra Bank’s tight to invoke recovery provisions of Sections 13(2), 13(4) and 14 of the SARFAESI Act against borrowers, the Supreme Court has ruled that loan/debt which was not covered by the SARFAESI Act at its inception assumes the character of a ‘secured debt’ thereunder once it is taken over by a ‘bank’ within the meaning of Section 2(1)(c) of the Act, regardless of whether the original lender was a notified “financial institution” under Section 2(1)(m) at the time of disbursement.
The Supreme Court reaffirmed the ratio of M.D. Frozen Foods Exports Private Limited vs. Hero Fincorp Limited [(2017) 16 SCC 741] and Indiabulls Housing Finance Limited vs. Deccan Chronicle Holdings Limited [(2018) 14 SCC 783] that the SARFAESI Act applies to all claims which are ‘live and owing’ as on the date it becomes applicable to the institution holding the loan account, and that a successor-in-interest or assignee bank stands on the same footing as the original lender for the purpose of invoking the Act.
The Apex Court said that borrowers cannot escape the rigours of the SARFAESI Act by dissecting and nit-picking the definitions in Section 2(1) of the Act, since the purposive interpretation adopted by the Court forecloses any argument that the Act is inapplicable merely because the original lender was an unnotified NBFC. At the same time, the Court clarified that the Reserve Bank of India’s guidelines dated July 13, 2005 on purchase and sale of non-performing assets, issued under Sections 21 and 35A of the RBI Act, 1934, carry statutory force and permit banks to acquire NPAs from NBFCs and financial institutions, thereby enabling assignee banks to enforce security interests under the SARFAESI Act.
A Two-Judge Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva noted that the SARFAESI Act was enacted to address the problem of mounting non-performing assets and to provide banks and financial institutions with an expeditious, court-free mechanism to enforce security interests. The Statement of Objects and Reasons recorded that the existing legal framework had not kept pace with changing commercial practices, leading to slow recovery and rising Non-Performing Assets (NPAs).
The Court examined the key definitions. Section 2(1)(c) defines ‘bank’ to include banking companies, corresponding new banks, SBI, subsidiary banks, multi-State co-operative banks, and any other bank notified by the Central Government. Section 2(1)(m) defines ‘financial institution’ to include public financial institutions, institutions notified under Section 2(1)(m)(iv), the IFC, debenture trustees, asset reconstruction companies, and other NBFCs notified by the Central Government. Section 2(1)(zd) defines ‘secured creditor’ to include banks, financial institutions, debenture trustees, ARCs, and other trustees holding securities on behalf of a bank or financial institution.
Briefly, the appeals arose out of loan accounts originally disbursed by City Financial Consumer Finance Limited (CFCFL), a non-banking financial company (NBFC), which were later taken over by Kotak Mahindra Bank Limited (KMBL), a banking company. At the time of lending, CFCFL was not notified as a ‘financial institution’ under Section 2(1)(m) of the SARFAESI Act, 2002, rather it was notified only on Aug 27, 2018. KMBL, which qualified as a ‘bank’ under Section 2(1)(c) of the SARFAESI Act, took over these loan accounts much earlier and then invoked Sections 13(2), 13(4) and 14 of the SARFAESI Act against the borrowers.
In the first matter, Amit Bipin Shah had availed a home loan of Rs. 69.60 lakhs from CFCFL to purchase a flat from the Mehtas. After default, an arbitral award of Rs. 75.30 lakhs were passed. KMBL took over the loan on July 13, 2012, issued a Section 13(2) demand notice on July 03, 2013, for Rs. 1.10 crores and obtained possession under Sections 13(4) and 14. The Mehtas challenged this before the DRT-II Mumbai, which held that KMBL, being only an assignee of CFCFL, could not invoke the SARFAESI Act. The DRAT and the Bombay High Court upheld this view.
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In the second matter, the Sables had availed two housing loans totalling Rs. 41.86 lakhs from CFCFL on Feb 25, 2009. After default and an ex parte arbitral award of Rs. 43.57 lakhs, KMBL took over the loan on April 09, 2013, issued a Section 13(2) notice on Nov 13, 2013, and took symbolic possession on June 25, 2014. The Sables’ securitisation application was dismissed for delay on Nov 23, 2017.
In the third matter, Poorti Rent a Car and Logistics Pvt Ltd. and its Directors had availed a loan of Rs. 2.98 crores from CFCFL in February 2009, declared an NPA in November/December 2009. KMBL took over the loan on July 18, 2012, issued a Section 13(2) notice on April 22, 2014, and obtained possession. The Bombay High Court dismissed their writ petition relying on M.D. Frozen Foods and Indiabulls, and the secured property was sold in 2023.
