Secured creditor priority prevails over FEMA seizure; later statutory security rights cannot be disturbed by a prior mortgage

Section 26E of the SARFAESI Act and Section 31B of the RDB Act were treated as giving secured creditors statutory priority over competing claims, so a FEMA seizure could not displace the bank's prior mortgage. Section 37A of FEMA, inserted after the mortgage was created, was held to be substantive and not retrospectively applicable to disturb pre-existing security interests. Although an appeal was available under FEMA, the availability of that remedy did not bar writ jurisdiction where the impugned action was said to be without jurisdiction and contrary to the secured creditor's overriding rights.

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Issues: (i) Whether the secured creditor's statutory priority under the SARFAESI and RDB regimes prevails over the alleged dues and seizure action under FEMA; (ii) Whether Section 37A of FEMA could be invoked against a mortgage created before that provision came into force; (iii) Whether the writ petition was barred by the availability of an appellate remedy under FEMA.

Issue (i): Whether the secured creditor's statutory priority under the SARFAESI and RDB regimes prevails over the alleged dues and seizure action under FEMA.

Analysis: Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 gives priority to secured creditors over all other debts and over revenues, taxes, cesses and other rates payable to the Government. Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 contains a similar non obstante priority rule in favour of secured creditors. The Court treated FEMA as an earlier special enactment and held that the later special enactments governing secured debt prevail. On that footing, the attempted seizure of the mortgaged property for alleged FEMA dues could not displace the bank's secured interest.

Conclusion: The issue was answered in favour of the petitioner bank; the secured creditor's priority prevailed over the FEMA claim.

Issue (ii): Whether Section 37A of FEMA could be invoked against a mortgage created before that provision came into force.

Analysis: The mortgage in favour of the bank was created on 20.02.2015, whereas Section 37A of the Foreign Exchange Management Act, 1999 was inserted with effect from 09.09.2015. The Court held that the provision is substantive in character and cannot operate retrospectively or retroactively so as to affect property already mortgaged before its commencement. The impugned seizure order, insofar as it proceeded under Section 37A, was therefore not supportable against the earlier mortgage.

Conclusion: The issue was decided in favour of the petitioner bank; Section 37A could not be invoked against the pre-existing mortgage.

Issue (iii): Whether the writ petition was barred by the availability of an appellate remedy under FEMA.

Analysis: Although an appeal was available under Section 37A(5) of the Foreign Exchange Management Act, 1999, the Court held that the impugned order was without jurisdiction and contrary to the overriding statutory rights of the secured creditor. In such circumstances, the existence of an alternate remedy did not prevent exercise of writ jurisdiction under Article 226 of the Constitution of India.

Conclusion: The issue was answered in favour of the petitioner bank; the writ petition was maintainable.

Final Conclusion: The mortgaged property was protected by the secured creditor's statutory priority, the FEMA seizure could not stand against the prior mortgage, and the writ court granted relief by quashing the impugned order and directing release of the property.

Ratio Decidendi: A later enactment conferring statutory priority on secured creditors prevails over an earlier conflicting special law, and a substantive provision cannot be applied retrospectively to disturb rights created before its commencement.

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