India: Loans From NBFCs Have No Recourse Under The SARFAESI Act Says The Bombay High Court

Last Updated: 11 November 2015
Article by Phoenix Legal

In a recent decision in Kotak Mahindra Ltd. vs. Trupti Sanjay Mehta of Bombay1, a division bench of the Bombay High Court (V.M. Kanade & A.R. Joshi, JJ.) has held that loans granted by a Non-Banking Financial Company (NBFC) cannot be recovered by instituting proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), even if the loan is assigned by the NBFC to a bank or securitisation company.

Although the decision of the Bombay High Court does not deal with the earlier and similar decision of the Andhra Pradesh High Court in M/s Deccan Chronicles Holdings Ltd. vs. Union of India2, it nevertheless reaches the same conclusion.

The loan transaction and the decision of the DRT:

The borrower (Respondent No. 4) originally availed a loan from Citi Financial Consumer Finance (Citi Financial), an NBFC, and mortgaged a flat with Citi Financial in order to secure repayment of the loan. The borrower defaulted in repaying the loan and Citi Financial instituted arbitration against the borrower, eventually resulting in an award in favour of Citi Financial on July 21, 2010. Thereafter, by way of a Deed of Assignment dated July 18, 2012, Citi Financial transferred, assigned and released the entire amount payable by the borrower to Citi Financial in favour of the Petitioner – Kotak Mahindra Bank Ltd. (Kotak).

In view of the assignment, Kotak proceeded to take steps for realising the outstanding amounts owed by the borrower and under Section 13 (2) of the SARFAESI Act, issued a notice dated July 3, 2013 to the borrower. As there was no reply from the borrower, Kotak filed an application under Section 14 of the SARFAESI Act before the Court of the Chief Metropolitan Magistrate, Esplanade, Mumbai for taking possession of the mortgaged flat. At the time of taking possession, Respondent Nos. 1 and 2 were residing in the mortgaged flat, and challenged the application of Kotak by filing a securitization application before the Debts Recovery Tribunal (DRT).

The Presiding Officer of the DRT, Mumbai held that in spite of being a bank, Kotak was not entitled to exercise the provisions and powers under the SARFAESI Act as Citi Financial was not a financial institution for the purposes of the SARFAESI Act. On Appeal, the Debt Recovery Appellate Tribunal too, upheld the view of the Presiding Officer and rejected the appeal. It is from these orders that the Petitioners appealed to the Bombay High Court by way of a writ petition.

The Bank's case:

The case for Kotak was based on identical nature of the definitions of crucial and material terms such as "debt", "secured creditor", "secured asset" and "security interest" between the SARFAESI Act and the Recovery of Debts due to Banks and Financial Institutions (RDDBFI Act). Kotak submitted that as Citi Financial has assigned the debt to Kotak, a security interest was created in favour of Kotak as understood by and defined under the RDDBFI Act and the SARFAESI Act. Therefore, third parties such as the Respondent Nos. 1 and 2, who were merely residing at the mortgaged flat could not question such an assignment or the exercise of SARFAESI Act provisions by Kotak.

In support of this argument, Kotak also argued that the assignment by Citi Financial, being an NBFC, to Kotak was permitted by law and hence legal, valid and binding on all, including the Respondent Nos. 1 and 2. It was argued that the definition of "security interest" under the SARFAESI Act does not contemplate that only a secured creditor within the meaning of the SARFAESI Act could be the assignor.

The borrower's case:

The borrower too, based his case on the interpretation of the definition of various key terms under the SARFAESI Act such as "financial assistance", "financial asset", "secured creditor", "bank", "financial institution", "securitization company", "reconstruction company", "secured assets", "secured interest", "originator" and "secured debt", in addition to Section 13 of the SARFAESI Act which is the cornerstone provision allowing recovery of dues by disposal of the secured assets without the intervention of a court.

The borrower interpreted these provisions to argue that the measures under the SARFAESI Act can be enforced by a secured creditor only against the borrower as defined under the SARFAESI Act. A person would qualify as a borrower under the SARFAESI Act only if he or she had been granted the financial assistance by any person that was a bank or financial institution for the purposes of the SARFAESI Act, and not by an NBFC. On this line, it was further argued that Citi Financial's assignment of the debt to Kotak would not vest any power in Kotak, being the assignee, to apply for recovery of the secured debt under the provisions of the SARFAESI Act. In support, the judgment of the Andhra Pradesh High Court in M/s Deccan Chronicles Holdings Ltd. vs. Union of India was relied upon.

The decision and the Court's rationale:

In an erudite judgment penned by V.M. Kanade, J. the court went into the scheme, purpose and the investment climate in India at the time when the RDDBFI Act and the SARFAESI Act were enacted. To this end, the decision discusses extensively the judgment of the Supreme Court of India in Mardia Chemicals Ltd. vs. Union of India3 and Transcore vs. Union of India4.

The court observed that Section 13 of the SARFAESI Act has to be read alongwith the scheme of the SARFAESI Act, and the terminologies as defined under the SARFAESI Act. If the SARFAESI Act is read in this manner, it becomes evidently clear that the provisions under it can only be enforced by a secured creditor against the borrower as defined under Section 2 (f) of the SARFAESI Act. This definition states in no uncertain terms that only if the financial assistance which is given to the borrower is assigned by a reconstruction company or securitisation company to a bank or vice-versa, can the assignment be covered under the SARFAESI Act. Therefore, as a natural corollary, it can be seen that measures under section 13(4) of the SARFAESI Act against the borrower can only be initiated by a bank or financial institution that has given the borrower financial assistance, or by a reconstruction company or securitisation company which has acquired the financial assistance from any bank or financial institution. The court also observed that the understanding and definition of a borrower is identical under the RDDBFI Act.

By this rationale, the court held a person could be termed as a borrower for the purposes of the SARFAESI Act only if the monies have been borrowed from a bank or a financial institution. The court also clarified that the definition of a borrower under the SARFAESI Act specifically excludes any other type of institution, including an NBFC. Consequently, a secured creditor can proceed for recovery under the provisions of the SARFAESI Act only against a borrower who has borrowed monies from a bank or a financial institution. In these terms, the writ petition came to be dismissed.

NBFCs notified as PFIs:

The decision of the Bombay High Court is however not binding on NBFCs which have been notified as Public Financial Institutions (PFI) by the Ministry of Corporate Affairs. By virtue of being notified as a PFI, an NBFC acquires the status of a financial institution for the purposes of the SARFAESI Act, and can therefore enjoy the benefits of the recovery mechanism provided by the SARFAESI Act.

Footnotes

1.Judgment dated July 16, 2015 in W.P. (C) No. 722 of 2015

2. AIR 2014 Andhra Pradesh 78

3. AIR 2004 SC 2371

4. AIR 2007 SC 712

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions