The Supreme Court has clarified that a bank can invoke the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to recover a secured loan acquired from an NBFC that was not covered by the Act when the loan was originally granted.
A Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva held that once such a loan account is taken over by a bank to which the SARFAESI Act applies, the loan acquires the character of a secured debt under the Act for recovery purposes.
Background of the Case
The lead appeal, Kotak Mahindra Bank Limited v. Trupti Sanjay Mehta and Others, arose from a home loan originally granted by City Financial Consumer Finance Limited (CFCFL), an NBFC that was not then notified as a financial institution under the SARFAESI Act.
Kotak Mahindra Bank later took over the loan account and initiated recovery proceedings under the SARFAESI Act. The borrowers challenged the action before the Debts Recovery Tribunal, which held that the bank could not use SARFAESI because the original lender was not covered by the Act when the debt was created.
The Bombay High Court upheld that view in 2015.
Two connected appeals concerned other loan accounts originally advanced by CFCFL and subsequently assigned to Kotak Mahindra Bank. In one of them, the secured property had already been sold in 2023.Court's Observation
The Supreme Court examined its earlier decisions in M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd. and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd. It noted that those rulings had already recognised that a successor or assignee of a loan could invoke SARFAESI even where the original lender was not covered by the Act at the relevant time.
The Bench found that the same principle applied when a bank itself acquired the loan. The Court observed:
“acquisition of a non-performing secured loan account by such institution would immediately clothe the said loan account with the attributes of a ‘secured debt’”
The Court further held that the borrowers could not rely on isolated definitions in the Act to defeat its recovery mechanism once the statutory conditions were satisfied.
Decision
The Supreme Court held that Kotak Mahindra Bank was legally entitled to invoke SARFAESI for the acquired loan accounts. It found the Bombay High Court's decision in the Mehtas' case incorrect and set aside the High Court judgment along with the underlying orders. The Mehtas' securitisation application was restored to the Debts Recovery Tribunal for consideration of their remaining factual and legal issues.
In the Sables' case, the Court held that Kotak Mahindra Bank was entitled to invoke Section 14 of the SARFAESI Act for taking physical possession of the secured property. In the Poorti Rent a Car matter, the Court upheld the Bombay High Court's view, noting that the secured property had already been sold in 2023.
Accordingly, Civil Appeal No. 8531 of 2015 was allowed, while the other two appeals were dismissed. Pending applications were also dismissed, with the parties directed to bear their own costs.
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