2025 (3) TMI 735 - HC - Indian Laws

Writ of prohibition issued restraining magistrate from entertaining SARFAESI Act Section 14 application due to insufficient asset size threshold

M/s. Pyramid Developers Versus Union of India, Reserve Bank of India, M.J. Shah Capital Private Limited and State of Maharashtra, Bombay

Bombay HC issued writ of prohibition restraining Chief Metropolitan Magistrate from entertaining application under Section 14 of SARFAESI Act, 2002. Court ... Initiation of proceedings by invoking the provisions of Section 14 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - financial institution as contemplated by Section 2(1)(m)(iv) of the Act of 2002 or not - HELD THAT:- Since the prayer is to grant a writ of Prohibition, the objection raised on behalf of the 3rd respondent of availability of an alternate remedy after the order is passed under Section 14 of the Act of 2002 does not warrant acceptance. If it is shown that the 3rd respondent is not a financial institution nor a secured creditor, as defined under the Act of 2002, it would not be in a position to invoke the jurisdiction under Section 14 of the Act of 2002 for seeking any assistance for taking possession of the secured asset. It would therefore require consideration as to whether the Chief Metropolitan Magistrate is empowered to entertain the application preferred by the 3rd respondent under Section 14 of the Act of 2002 and provide assistance as sought. Thus, a “secured creditor” means a “financial institution”, as defined by Section 2(1)(m)(iv) of the Act of 2002, which would thus require such financial institution to satisfy the requirements of the Notification dated 24th February 2020. As per the affidavit-in-reply filed by the Reserve Bank of India, the asset size of the 3rd respondent as on 31st March 2024 was Rs.16.30 crores which is less than the amount of Rs.100 crores as indicated in the Notification dated 24th February 2020 - for the purposes of the Act of 2002, the 3rd respondent is not a financial institution and hence it cannot be a secured creditor so as to invoke the provisions of Section 14 of the Act of 2002. Conclusion - As the 3rd respondent is not shown to be a “financial institution” for the purposes of invoking the provisions of Section 14 of the Act of 2002, the application filed on its behalf before the Chief Metropolitan Magistrate cannot be adjudicated on merits. A case therefore has been made out for a writ of Prohibition to be issued. Application disposed off. ISSUES PRESENTED and CONSIDEREDThe primary issue considered by the Court was whether the 3rd respondent, M.J. Shah Capital Pvt. Ltd., qualifies as a 'financial institution' under Section 2(1)(m)(iv) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the Act of 2002), thereby allowing it to invoke the provisions of Section 14 of the Act for enforcement of its security interest. The secondary issue was whether a writ of Prohibition should be issued to restrain the Chief Metropolitan Magistrate from proceeding with the application under Section 14 of the Act of 2002.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe Court examined the definitions provided in the Act of 2002, particularly Section 2(1)(zd) defining 'secured creditor' and Section 2(1)(m) defining 'financial institution.' The Court also considered the Notification dated 24th February 2020, which sets the criteria for an entity to be considered a financial institution under the Act.Court's Interpretation and ReasoningThe Court interpreted that for an entity to be considered a 'financial institution' under the Act, it must meet the criteria specified in the Notification, which includes having assets worth Rs.100 crores and above. The Court emphasized that the status of the 3rd respondent as a financial institution must be determined at the time it invoked the jurisdiction of the Court of the Chief Metropolitan Magistrate.Key Evidence and FindingsThe Court relied on the affidavit-in-reply filed by the Reserve Bank of India, which stated that the asset size of the 3rd respondent as of 31st March 2024 was Rs.16.30 crores, significantly less than the Rs.100 crores required by the Notification. This evidence was crucial in determining that the 3rd respondent did not qualify as a financial institution under the Act.Application of Law to FactsApplying the legal framework to the facts, the Court found that the 3rd respondent could not be considered a financial institution for the purposes of the Act of 2002 due to its asset size. Consequently, it could not invoke Section 14 of the Act to seek assistance from the Chief Metropolitan Magistrate.Treatment of Competing ArgumentsThe 3rd respondent argued that the Notification should not apply retrospectively to affect its rights under the loan agreement dated 10th October 2017. The Court rejected this argument, clarifying that the relevant date for determining the 3rd respondent's status as a financial institution was when it filed the application under Section 14 of the Act on 29th April 2024. The Court also dismissed the argument regarding the availability of an alternate remedy, stating that the issue of jurisdiction was fundamental and could be addressed through a writ of Prohibition.ConclusionsThe Court concluded that since the 3rd respondent did not meet the criteria to be considered a financial institution under the Act, it was not entitled to invoke the provisions of Section 14. Therefore, the application filed by the 3rd respondent before the Chief Metropolitan Magistrate could not be adjudicated on merits.SIGNIFICANT HOLDINGSThe Court issued a writ of Prohibition to prevent the Chief Metropolitan Magistrate from proceeding with Securitization Case No.598 of 2024. The Court held that the 3rd respondent, not being a financial institution under the Act, could not seek enforcement of its security interest through Section 14.Core Principles EstablishedThe judgment reinforced the principle that jurisdictional issues can be addressed through a writ of Prohibition when an entity lacks the legal standing to invoke statutory provisions. It also clarified that the status of an entity as a financial institution must be assessed at the time of invoking jurisdiction, not based on past agreements or transactions.Final Determinations on Each IssueThe Court determined that the 3rd respondent did not qualify as a financial institution under the Act and therefore could not proceed with its application under Section 14. The writ of Prohibition was granted, preventing further proceedings in the case before the Chief Metropolitan Magistrate.