Provisions Of Rent Act Will Not Have Overriding Effect Over Provisions Of SARFAESI Act: Karnataka High Court

A division bench of Chief Justice Ritu Raj Awasthi and Justice Sachin Shankar Magadum held that, "A secured creditor in whose favour the security interest has been created has a priority in sale and payment over all other charges, if any."

The Appellant Abdul Khader, a lessee of a property which was mortgaged with Bank of Maharashtra, had challenged the order dated December 5, 2019, of the single judge bench by which it had reserved liberty to the petitioner to avail alternative remedy under Section 17 of the SARFAESI Act before the appropriate tribunal.

The appellant placing reliance on sub-clause (3) of Section 14 of the SARFAESI Act, submitted to the Court that he has no remedy of an appeal and therefore, has rightly invoked the writ jurisdiction and this aspect is not dealt with by the learned Single Judge.

Further, relying on section 65-A of the Transfer of Property Act, 1882 it was contend that where a secured asset is in possession of a lessee under a valid lease, the Chief Metropolitan Magistrate or the District Magistrate have no power to invoke the provisions of Section 14 of the SARFAESI Act.

It was also said that where a secured asset is in possession of a lessee/tenant or borrower, the tenant is entitled for protection against unjust evictions in the light of the provisions of the Rent Control Act.

Court findings:

Firstly the court decided on the issue of whether an aggrieved person other than the principal borrower has a remedy against an order passed under Section 14 of the SARFAESI Act by a District Magistrate. It referred to Section 17(4A) of the SARFAESI Act and said that, "The above said sub-section (4A) leaves no manner of doubt that appellant who is asserting leasehold rights on the ground that he is a tenant of the premises which is the subject matter of recovery proceedings under the SARFAESI Act, has an efficacious remedy under sub-section (4A) of Section 17 of the SARFAESI Act."

It added that, "DRT Act and SARFAESI Act not only facilitate creation of special machinery for speedy recovery of dues of banks and financial institutions, but equally provides an adequate remedy to those who are in possession of the secured assets either as a tenant or under some other possessory rights."

Following which the court decided on the second issue framed about whether the provisions of Rent Act has an overriding effect over the SARFAESI Act.

It relied on section 26-E of the SARFAESI Act which reads thus: 'Priority to secured creditors.- Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts nd all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.'

The court thereafter opined that, "The non obstante clause under the provision makes the intention of the parliament explicit that even against statutory charges created under the Central Act, secured creditor shall have the right for priority in payment and priority to release the debt for bringing the secured asset for sale. The non obstante clause used in Section 26-E is a tool by which the legislature gives complete predominance to that provision over all other provisions of law."

The court also observed that the lease agreement was executed subsequent to the landlord depositing title deeds by executing equitable mortgage deed on 03.11.2017. It said that, "Therefore, we are unable to understand, under the lease agreement, how the appellant can assert and claim right under Section 65-A of the Transfer of Property Act. Even if the appellant had any such right under Section 65-A of the Transfer of Property Act, even then in terms of Section 26-E of the SARFAESI Act, the secured creditor has precedence and first charge over the secured assets and it is well within the jurisdiction of the Bank to proceed against the secured assets."

Accordingly the court dismissed the appeal holding that it was devoid of merits.

Case Title: Abdul Khader v. Sadath Ali Siddiqui

Case No: Writ Appeal No.1102 of 2021

Date of Order: 30th Day of November, 2021

Appearance: Advocate Amaresh A. Angadi, for appellant.

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