SARFAESI Act provisions override FEMA regarding secured creditor priority over government dues

Karnataka HC held that SARFAESI Act provisions prevail over FEMA regarding secured creditor priority. The court ruled that debts due to secured creditors take priority over all other debts including government dues. Since SARFAESI Act (2002) is later legislation than FEMA (1999), it overrides FEMA provisions. The attachment order by authorities under FEMA was quashed as the property was already mortgaged to the petitioner bank prior to the seizure order. Section 37A of FEMA being prospective could not apply to pre-existing mortgages. The petition was allowed and authorities were directed to release the mortgaged property.

---

---

Issues Involved:
1. Priority of secured creditor's debt under Section 26E of the SARFAESI Act over other dues, including those under FEMA.
2. Applicability of Section 37A of FEMA to properties mortgaged before its enactment.
3. Priority of secured creditors under Section 31B of the RDBI Act.
4. Jurisdiction and legality of the impugned order passed under Section 37A of FEMA.
5. Availability of an alternative remedy under Section 37A(5) of FEMA.

Issue-wise Detailed Analysis:

1. Priority of Secured Creditor's Debt under Section 26E of SARFAESI Act:
The petitioner argued that under Section 26E of the SARFAESI Act, debts due to secured creditors have priority over all other debts, including government dues. The court agreed, emphasizing that the SARFAESI Act, being a later enactment, prevails over FEMA. The court cited the case of Solidaire India Ltd. vs. Fairgrowth Financial Services and others, which established that the later special law prevails over the earlier one. Therefore, the SARFAESI Act overrides FEMA, and the petitioner's secured debt takes precedence.

2. Applicability of Section 37A of FEMA to Properties Mortgaged Before Its Enactment:
The court examined whether Section 37A of FEMA, which came into force on 09.09.2015, could apply to properties mortgaged before this date. The court concluded that Section 37A is substantive and cannot be applied retrospectively. Since the mortgage in favor of the petitioner was created on 20.02.2015, before Section 37A came into effect, the provision could not be invoked for the impugned order. Thus, the seizure order was deemed inapplicable and without jurisdiction.

3. Priority of Secured Creditors under Section 31B of RDBI Act:
The court referred to Section 31B of the RDBI Act, which grants secured creditors priority over all other debts, including government dues. The court cited the Full Bench decision of the Madras High Court in Assistant Commissioner vs. Indian Overseas Bank, affirming that secured creditors' rights to realize secured debts have priority over government dues. Consequently, the petitioner's claim under the SARFAESI Act prevails over the dues under FEMA.

4. Jurisdiction and Legality of the Impugned Order Passed under Section 37A of FEMA:
The court found the impugned order dated 31.03.2022, passed under Section 37A(1) of FEMA, to be illegal and without jurisdiction. The court emphasized that the schedule property was already mortgaged to the petitioner before the enactment of Section 37A. Therefore, the respondent had no authority to seize the property under FEMA, making the impugned order arbitrary and unlawful.

5. Availability of an Alternative Remedy under Section 37A(5) of FEMA:
The respondents argued that the petitioner had an alternative remedy by appealing under Section 37A(5) of FEMA. However, the court held that since the impugned order was without jurisdiction, the availability of an appeal did not preclude the court from exercising its jurisdiction under Article 226 of the Constitution. The court rejected the contention that the petitioner should be denied relief due to the existence of an alternative remedy.

Conclusion:
The court allowed the petition, quashing the impugned order dated 31.03.2022. The court directed the respondent to release the mortgaged property to the petitioner within four weeks, reinforcing the priority of secured creditors under the SARFAESI Act and RDBI Act over dues under FEMA.

---