TaxTMI 
TaxTMI 
2026 (9) TMI 289
X X X X Extracts X X X X
X X X X Extracts X X X X
....debt. 2. In Civil Appeal No. 8531 of 2015, Kotak Mahindra Bank Limited (KMBL) is the appellant. City Financial Consumer Finance Limited (CFCFL), a non-banking financial company (NBFC), respondent No. 3, was initially not a 'financial institution' notified under Section 2(1)(m) of the SARFAESI Act. During that initial stage, Amit Bipin Shah, respondent No. 4, availed a home loan from it to acquire a residential flat from Trupti Sanjay Mehta and her husband, Sanjay Walchand Mehta (together, 'the Mehtas'), respondent Nos. 1 and 2. He executed a loan agreement for Rs.69,60,000/-with CFCFL and pursuant thereto, a sum of Rs.66,72,360/- was said to have been transferred by CFCFL to the Mehtas. However, Amit Bipin Shah failed to repay his debt to CFCFL leading to arbitration proceedings, whereupon he was directed to pay a sum of Rs.75,30,872/- to CFCFL with interest thereon, vide Award dated 31.07.2010. 3. While so, KMBL took over this loan account from CFCFL on 13.07.2012. KMBL then initiated proceedings under the SARFAESI Act by issuing a demand notice under Section 13(2) thereof on 03.07.2013. As per the said notice, Amit Bipin Shah was liable to pay a sum of Rs.1,10,39,111/- as o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the flat to them upon their doing so. It was made clear that this was an interim arrangement, subject to final adjudication of this appeal, and was without prejudice to the contentions raised therein. The Mehtas were directed not to create any third party interests over the flat and to deposit the original documents in their possession with the Registry of this Court. Pursuant thereto, the Mehtas deposited Rs.40 lakh with KMBL on 30.05.2017 and certain documents with the Registry. KMBL handed over possession of the flat to the Mehtas on 02.06.2017. We are informed that the Mehtas are in possession thereof as on date. At this stage, we may also note their contention that Amit Bipin Shah was never conveyed title over the flat and that they continue to be the owners thereof. 6. In the appeal arising out of SLP (C) No. 33113 of 2018, the facts reveal that one Manohar Govind Sable; his son, Anil Manohar Sable; and his daughter-in-law, Jayashree Anil Sable, availed two housing loans of Rs.28,50,000/- and Rs.13,36,000/- respectively from CFCFL on 25.02.2009. Manohar Govind Sable died on 30.05.2011. Anil Manohar Sable and Jayashree Anil Sable (together, 'the Sables'), remained in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. and its Directors, Jagdish B. Khurana and Sucheta J. Khurana. They availed a loan of Rs.2.98 crores from CFCFL in February, 2009. This loan was declared a non-performing asset by CFCFL in November/December, 2009. The loan account was taken over by KMBL from CFCFL under deed of assignment dated 18.07.2012. Thereupon, KMBL invoked the provisions of the SARFAESI Act and issued them a notice under Section 13(2) thereof on 22.04.2014. The appellants responded by disputing KMBL's power to take recourse to the provisions of the SARFAESI Act. However, acting at the behest of KMBL, the learned Chief Metropolitan Magistrate, Esplanade, Mumbai, passed an order on 01.10.2014, under Section 14 of the SARFAESI Act, directing delivery of possession of the appellants' property to KMBL. Assailing the said order, the appellants filed WP No. 11371 of 2014 before the Bombay High Court. By judgment dated 24.02.2022, a Division Bench dismissed the appellants' writ petition on the ground that the issue stood decided against them by the decisions of this Court in M.D. Frozen Foods Exports Private Limited and others vs. Hero Fincorp Limited (2017) 16 SCC 741 and Indiabulls Housing Finance Limited vs.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efinitions and states that, unless the context otherwise requires, for the purposes of the said Act, the terms used therein would be as defined under Section 2(1)(a) to 2(1)(zj) thereof. Section 2(1)(c) defines 'bank' to mean a banking company; or a corresponding new bank; or the State Bank of India; or a subsidiary bank; or a multi-State co-operative bank; or such other bank which the Central Government may, by notification, specify for the purposes of the SARFAESI Act. Section 2(1)(d) defines 'banking company' to have the meaning assigned to it in Section 5(c) of the Banking Regulation Act, 1949. Section 2(1)(f) defines 'borrower' to mean, amongst other things, a person who has been granted financial assistance by a bank or financial institution or who has given any guarantee or created any mortgage or pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes a borrower of an asset reconstruction company, consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance. Section 2(1)(ha) earlier defined 'debt' to have the meaning assigned to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- (i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956); (ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993); (iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958); (iiia) a debenture trustee registered with the Board and appointed for secured debt securities; (iiib) asset reconstruction company, whether acting as such or managing a trust created for the purpose of securitisation or asset reconstruction, as the case may be; (iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act;' 13. Section 2(1)(o) of the SARFAESI Act defines 'non-performing asset' to mean an asset or account of a borrower, which has been classified by a ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uisition, be deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in relation to such financial assets. 16. This being the statutory milieu of the SARFAESI Act, we may note that the cases on hand turn on facts which do not fit squarely within the framework thereof. Admittedly, as on the date of lending by the CFCFL and creation of secured debts in its favour by its borrowers, CFCFL was not a 'financial institution' within the meaning of Section 2(1)(m) of the SARFAESI Act. The notification by the Central Government declaring it to be so under Section 2(1)(m)(iv) was issued only on 27.08.2018. However, KMBL, a banking company, that qualified as a 'bank' under Section 2(1)(c) of the SARFAESI Act, took over those loan accounts from CFCFL long before it was notified as a 'financial institution' under Section 2(1)(m)(iv) thereof. Having acquired such loan accounts, could KMBL take recourse to the SARFAESI Act for recovering the dues in relation to those loan accounts. 17. In this regard, as the Bombay High Court held in favour of KMBL in one instance, citing two decisions of this Court as squarely covering the issue, it would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... date on which a debt is declared to be a non-performing asset would have no impact as the SARFAESI Act would become applicable qua all debts owing and live when the SARFAESI Act became applicable to the NBFC. 19. In Indiabulls (supra), the issue was whether the SARFAESI Act would apply when Indiabulls Financial Services Limited (IFSL), the NBFC which disbursed the loan to the borrower in the year 2012, was then merged with its sister concern, Indiabulls Housing Financial Limited (IHFL), and upon sanction of the said merger, the assets and liabilities of IFSL stood vested in IHFL. Pursuant thereto, the borrowers of IFSL became the borrowers of IHFL. IFSL was not notified as a 'financial institution' under Section 2(1)(m) of the SARFAESI Act, whereas IHFL was. The question was whether IHFL, which had taken over the assets of IFSL, could invoke the SARFAESI Act for recovery of the loans inherited by it upon the merger. It was argued on behalf of the borrower, respondent No.1 therein, that it was not granted financial assistance by a 'bank' or 'financial institution', within the meaning of the SARFAESI Act, and the loan agreements entered into by it with IFSL could not be classifie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red for consideration of the other issues raised therein on their own merits. It was pointed out that, pursuant to the order passed by this Court, the Mehtas deposited Rs.40 lakh with KMBL and it is stated that they are willing, without prejudice to their rights and contentions, to deposit a further sum of Rs.25 lakh with KMBL, subject to the final orders that would be passed in their securitization application. 23. Further, we find that the Mehtas filed applications seeking to implead Punjab National Bank and the Assets Reconstruction Company of India Limited on the ground that Amit Bipin Shah availed financial assistance from these entities also on the strength of his agreement of sale with them. However, we are not inclined to go into those aspects. The impleadment applications are, therefore, liable to be dismissed. 24. As regards the loan accounts of the Sables, KMBL pointed out that their loan agreements with CFCFL authorized the assignment of their debts and entitled the assignee to exercise all the rights of the original lender. KMBL would, therefore, contend that it is not open to the Sables to dispute its right to enforce the 'security interest' created by them for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RFAESI Act, except for Section 17(2) thereof, which was held to be ultra vires. It was observed that, for the financial assistance rendered to industries by financial institutions, liquidity is essential, failing which there would be a blockade of large sums of money, creating circumstances that retard economic progress, followed by a large number of other consequential ill-effects. Noting that liquidity of finances and flow of money is essential for any healthy/growth-oriented economy, it was observed that what must kept in mind is that the law should not be in derogation of the rights guaranteed to the people under the Constitution and the procedure should also be fair, reasonable and valid, though it may vary looking to the different situations that need to be tackled and the object to be achieved. Noting that expert committees had recommended having a law which provides a speedier remedy for improvement of general financial flow of money necessary for the economy of the country, the Bench observed that the SARFAESI Act was in public interest and individual interest had to be subservient to it. It was held that, even if a few borrowers are affected here and there, that would not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....07.2005, and observed that the said guidelines have the statutory force of law. This Court further observed that the RBI, by way of these guidelines, allowed banks to engage in trading in non-performing assets with the purpose of cleaning the balance sheets, so that they could raise the capital adequacy ratio. It was held that all these would come within the ambit of Section 21 of the Reserve Bank of India Act, 1934, which enabled the RBI to frame policy in relation to advances to be followed by banking companies. 29. RBI pointed out that it would be in the interest of the financial system that banks are enabled to enforce security interests of non-performing assets acquired by them from other institutions. It asserted that, if the provisions of the SARFAESI Act are interpreted in a restrictive manner, as was done by the Bombay High Court in the impugned judgment dated 16.07.2015, it would result in a situation where an assignee bank would not be able to take recourse to the provisions thereof for enforcing the security interest on the default of a borrower. It pointed out that the rights and liabilities of a borrower under a loan agreement would not be affected by the fact that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered by the edict in M.D. Frozen Foods (supra) and the loans would have been recoverable by it under the provisions of the SARFAESI Act. The question is whether the taking over of such loans prior to that date by KMBL, a 'bank', under Section 2(1)(c) of the SARFAESI Act, disentitled it from invoking the provisions thereof for effecting recovery. 32. The SARFAESI Act facilitates liquidation of non-performing assets and bad debts by 'banks' and 'financial institutions' so as to aid in the growth of the economy. No doubt, it provides for harsh measures in that regard, minimizing the scope of judicial intervention to a great extent. However, the objective of the enactment cannot be lost sight of. The argument of the borrowers before us, if accepted, would mean that those who avail financial assistance from NBFCs not covered by Section 2(1)(m) of the SARFAESI Act enjoy greater freedom to commit default in repayment of such loans, as recovery could only be through ordinary, time-consuming civil processes, when compared with those who avail financial assistance from NBFCs covered by Section 2(1)(m) of the SARFAESI Act, entailing quicker and easier recovery thereunder. Irrespective of w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, its loan agreement could not be classified as a 'security arrangement' The earlier decision in M.D. Frozen Foods (supra) was applied, observing that it was held therein that a successor-in-interest to the loan/debt would be entitled to take recourse to the SARFAESI Act even if the original lender was not a 'financial institution' covered by the said Act at the relevant time. 36. The decisions in M.D. Frozen Foods (supra) and Indiabulls (supra), therefore, put it beyond the pale of doubt that once a claim is 'live and owing' as on the date of coming into force of the SARFAESI Act, the provisions thereof would be available, as and when it becomes applicable to the institution holding that loan account. By the same logic, when the institution is one to which the SARFAESI Act is already applicable, acquisition of a non-performing secured loan account by such institution from an entity, that does not come within the ambit of the SARFAESI Act, would immediately clothe the said loan account with the attributes of a 'secured debt' covered by the provisions of the SARFAESI Act. In essence, it makes no difference as to whether it is the loan/debt along with the institution that comes w....