Banks can use SARFAESI to recover secured loans acquired from NBFCs not covered by the Act, Supreme Court rules

City Financial Consumer Finance Limited (“CFCFL”), an NBFC, granted housing and other loans to the respondents in 2009. At the time of lending and creation of the mortgages, CFCFL was not a “financial institution” notified under Section 2(1)(m)(iv) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).

Kotak Mahindra Bank Limited (“KMBL”), a “bank” under Section 2(1)(c), subsequently acquired the loan accounts from CFCFL through deeds of assignment in 2012 and 2013. KMBL thereafter issued notices under Section 13(2), took measures under Section 13(4), and sought assistance under Section 14 of the SARFAESI Act for taking possession of the secured properties.

In the Mehtas’ case, the DRT, the DRAT and the Bombay High Court held that KMBL could not invoke the SARFAESI Act because the original lender was not covered by the Act when the debt was created. The Sables and Poorti Rent a Car similarly challenged KMBL’s SARFAESI measures on the same jurisdictional ground.

Whether a bank covered by Section 2(1)(c) of the SARFAESI Act can invoke the Act to recover a secured debt assigned to it by an NBFC that was not a notified “financial institution” under Section 2(1)(m) when the debt and mortgage were created.

Whether such assignment causes the loan account and underlying security to acquire the status of a “secured debt” enforceable under the SARFAESI Act.

Whether KMBL was legally entitled to invoke Section 14 of the SARFAESI Act for taking possession of the Sables’ secured property.

The Court applied Sections 2(1)(c), 2(1)(f), 2(1)(ha), 2(1)(k), 2(1)(m), 2(1)(o), 2(1)(zb), 2(1)(zd), 2(1)(zf), 5 and 13–14 of the SARFAESI Act. These provisions, read purposively, permit a covered bank or financial institution to enforce a security interest securing a live and legally recoverable debt.

The Court relied principally on M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited, (2017) 16 SCC 741, which held that the SARFAESI Act applies to existing and “live” loan claims once the lender becomes a notified financial institution, irrespective of the lender’s status when the loan was originally granted.

It also relied on Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited, (2018) 14 SCC 783, which held that a successor-in-interest or assignee may invoke the SARFAESI Act even where the original lender was not covered by it at the relevant time.

Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311, was considered regarding the public and economic purpose of the SARFAESI Act and the validity of expeditious enforcement mechanisms.

The Court further referred to ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1, recognising assignment and trading of non-performing assets by banks in accordance with RBI guidelines.

The Court held that the decisive consideration was not the status of CFCFL at the time of originating the loans, but the status of the debt and its holder when enforcement was undertaken.

The loans remained live and legally recoverable, and the mortgages created security interests over the borrowers’ properties. Once KMBL, a bank expressly covered by Section 2(1)(c), acquired those loan accounts and the associated rights, it became entitled to enforce the underlying security under the SARFAESI Act.

The Court treated the present case as legally analogous to M.D. Frozen Foods and Indiabulls: in those cases, the lender’s subsequent notification or merger brought the existing debt within the Act; here, assignment of the debt to an already covered bank produced the same legal consequence.

A contrary interpretation would give borrowers who originally borrowed from non-notified NBFCs an unintended advantage and frustrate the SARFAESI Act’s objective of facilitating speedy recovery of non-performing assets and maintaining financial liquidity.

Accordingly, the Bombay High Court erred in holding at the threshold that KMBL lacked jurisdiction, although the Mehtas’ other objections remained open for adjudication by the DRT.

Civil Appeal No. 8531 of 2015 was allowed; the Bombay High Court, DRAT and DRT decisions in the Mehtas’ case were set aside, and S.A. No. 39 of 2014 was restored to the DRT for consideration of the remaining issues, subject to the Mehtas depositing a further ₹25 lakh with KMBL without prejudice.

In the Sables’ case, KMBL was held entitled to invoke Section 14, though the Sables could pursue remedies arising from any fresh cause of action.

The appeal concerning Poorti Rent a Car was dismissed, particularly as the secured property had already been sold in 2023.

The remaining appeals and pending impleadment/intervention applications were dismissed, with parties left to bear their own costs.