In a significant ruling, the Supreme Court on Wednesday (September 2) held that banks can take recourse to the SARFAESI Act, 2002, to recover debts assigned to them by NBFCs, notwithstanding that such NBFCs were not covered under the Act at the time the debt was created.

“…when the institution (bank) 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.”, observed a bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva while setting aside the Bombay High Court's judgment which had restricted the Kotak Mahindra Bank from invoking the SARFAESI Act for recovery of debts assigned to it by an NBFC that was not a notified financial institution under Section 2(1)(m) of the Act when the loans were advanced.

The dispute arose from loan accounts originally advanced by City Financial Consumer Finance Limited (CFCFL), an NBFC which, at the relevant time, was not a “financial institution” notified under Section 2(1)(m) of the SARFAESI Act.

CFCFL was subsequently notified as a financial institution under the Act on August 27, 2018.

Between 2012 and 2013, the Appellant-Kotak Mahindra Bank Ltd., which qualifies as a “bank” under Section 2(1)(c) of the SARFAESI Act, acquired three sets of loan accounts from CFCFL. The loans were secured by mortgages.

After taking over the loan accounts, Appellant-bank invoked the SARFAESI Act for recovery of the outstanding dues.

The borrowers challenged the bank's action, contending that the loans had been created at a time when CFCFL was outside the statutory definition of a financial institution under the SARFAESI Act. Therefore, according to them, the loans could not subsequently become amenable to SARFAESI proceedings merely because they were assigned to a bank.

Aggrieved by the Bombay High Court's Division Bench decision to affirm the view taken by the DRT and the DRAT declaring that the Appellant-bank was not entitled to invoke the SARFAESI Act to recover the debt taken over by it from CFCFL, prompted the bank to move to the Supreme Court.

Allowing the bank's appeal, the Court rejected the borrowers argument that a debt not covered under the SARFAESI Act at the time of its creation, would not assume the status of a 'secured debt' rendering the banks remediless to invoke the SARFAESI Act. Instead, the Court observed:

“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 whether a financial institution comes under the SARFAESI Act or not, the failure on the part of borrowers to repay their loans to such institution invariably sets off a chain reaction resulting in an adverse impact on the whole economy.”

The Court held that once a non-performing secured loan is acquired by a bank to which the SARFAESI Act applies, the loan account immediately acquires the statutory attributes of a secured debt under the 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. In both cases, the provisions of the SARFAESI Act would be available for effecting recovery of the loan/debt.”, the Court said.

The Court relied upon its earlier decisions in M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited (2017) and Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited (2018), to observed that the identity of the original lender cannot defeat SARFAESI enforcement once a secured non-performing loan has been acquired by a bank covered by the Act.

As a result, the appeal was allowed, directing the restoration of the Appellant-bank's securitisation application before the Debt Recovery Tribunal.

Cause Title: Kotak Mahindra Bank Limited versus Trupti Sanjay Mehta and others (with connected matters)

Citation : 2026 LiveLaw (SC) 886

Click here to download judgment

Appearance:

For Appellant(s) : SLP(C) No. 33113/2018 Mr. Satyajit A. Desai, Adv. Mr. Sachin Patil, Adv. Mr. Sachin Singh, Adv. Mr. Pratik Kumar Singh, Adv. Mr. Shashank Upadhyay, Adv. Ms. Anagha S. Desai, AOR

C.A. No. 8531/2015 Etc. Mr. Amar Dave, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Mr. Ankur Saigal, Adv. Ms. S. Lakshmi Iyer, Adv. Ms. Sukriti Bhatnagar, Adv. Ms. Anukanksha Singh, Adv. Mr. E.C. Agrawala, AOR

SLP(C) No. 9399/2022 Mr. Rohit Sharma, Adv. Mr. Nishanth Patil, AOR Mr. Arijit Dey, Adv. Mr. Nikhil Purohit, Adv. Mr. Jatin Lalwani, Adv. Ms. Bhumi Agrawal, Adv. Mr. Abhishek Gupta, Adv. Mr. Awanish Gupta, Adv. Ms. Harshita Jain, Adv.

For Respondent(s) : FOR KOTAK MAHINDRA BANK LTD. Ms. S. Lakshmi Iyer, Adv. Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Mr. Ankur Saigal, Adv. Ms. Sukriti Bhatnagar, Adv. Mr. E.C. Agrawala, AOR Ms. Anukanksha Singh, Adv. Mr. Umesh Shetty, Sr. Adv. Mr. Nitin Tambwekar, Adv. Ms. Pranita, Adv. Ms. Hina Mody, Adv. Mr. Seshatalpa Sai Bandaru, AOR Mr. Sanjay Kumar, Adv. Mr. Chanchal Kumar Ganguli, AOR Mr. Ramesh Babu, Sr. Adv. Ms. Nisha Sharma, Adv. Ms. Tanya Chowdhary, Adv. Ms. Mukti Chowdhary, AOR Ms. Khushi Jain, Adv.

FOR RBI Mr. H.S. Parihar, AOR Mr. Kuldeep S. Parihar, Adv. Ms. Ikshita Parihar, Adv.

FOR STATE OF MAHARASHTRA Ms. Rukhmini Bobde, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Shrirang B. Varma, Adv. Mr. Vinayak Aren, Adv.Mr. Jatin Dhamija, Adv. Ms. Aishwarya Nigam, Adv. Mr. Mudit Sharma, AOR Mr. Anup Jain, AOR Ms. Jasmine Damkewala, AOR