Banks Can Use SARFAESI Act for Debts Assigned by Non-SARFAESI Entities: SC

Expanding the enforcement scope for commercial lenders, the Supreme Court has ruled that a bank governed by the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 can invoke its summary recovery provisions for debts acquired from financial entities that were not covered under the Act at the time of creation. The verdict ensures that live non-performing assets taken over by banks automatically attract the statutory attributes of a 'secured debt', foreclosing defaulting borrowers from evading swift non-judicial recovery.

A Division Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva set aside a contrary judgment of the Bombay High Court while adjudicating a batch of appeals challenging the assignment of non-performing debt accounts.

Court's Rationale on Assignment of Debts

The Supreme Court analyzed the statutory framework under Section 2(1)(c), Section 2(1)(f), Section 2(1)(ha), Section 2(1)(m), and Section 2(1)(zd) of the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 along with provisions of the Banking Regulation Act, 1949 and Reserve Bank Of India Act, 1934. Repelling the challenge raised by defaulting borrowers, the Bench emphasized that the primary objective of the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 is to facilitate the rapid liquidation of bad debts and resolve asset-liability mismatches in the economy.

The Court noted that restricting the assignee bank's enforcement rights would create an unwarranted dichotomy where borrowers from non-notified non-banking financial companies enjoy relative immunity from non-judicial recovery mechanisms.

The Court, in its reasoning, observed: "...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 within the ambit of the SARFAESI Act, as in the earlier two decisions, or it is the loan/debt alone which comes within the ambit thereof, by virtue of it being taken over by a ‘bank’ to which the SARFAESI Act is already applicable."

The Court has the following directions:

"In consequence, Civil Appeal No. 8531 of 2015 is allowed and the other two appeals are dismissed.
Pending impleadment/intervention applications are also dismissed.
Parties shall bear their respective costs."

Background

The controversy arose in Civil Appeal No. 8531 of 2015 when Kotak Mahindra Bank Limited (KMBL) took over a defaulted home loan account in 2012 from City Financial Consumer Finance Limited (CFCFL), an NBFC which was not a notified financial institution under Section 2(1)(m) of the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 at the relevant time. When KMBL initiated recovery measures under Section 13(4) and Section 14 of the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 against the property, the Debts Recovery Tribunal, the Appellate Tribunal, and ultimately the Bombay High Court held that KMBL could not invoke the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 as its assignor was not covered by the Act when the debt was created.

In similar connected matters involving other borrowers, the Bombay High Court had taken divergent views, relying on precedents such as M.D. Frozen Foods Exports Private Limited and others vs. Hero Fincorp Limited and Indiabulls Housing Finance Limited vs. Deccan Chronicle Holdings Limited and others. The Reserve Bank of India also supported KMBL's stance before the Supreme Court, pointing out that its 2005 guidelines issued under Section 21 and Section 35A of the Reserve Bank Of India Act, 1934 permitted trading in non-performing assets, as affirmed in ICICI Bank Limited vs. Official Liquidator of APS Star Industries Limited and others ( "(2010) 10 SCC 1": 2010 CaseBase(SC) 1136).

Reversing the Bombay High Court's ruling in the lead matter, the Supreme Court held that the legal status of the acquiring bank governs the enforcement mechanism. The DRT proceedings in the lead appeal were restored subject to a conditional deposit, while connected challenges by defaulting borrowers were dismissed.

Case Details:
Case No.: Civil Appeal No. 8531 of 2015
Neutral Citation: 2026 INSC 943
Case Title: Kotak Mahindra Bank Limited v. Trupti Sanjay Mehta and others

Source: 2026 CaseBase(SC) 1808