Case Note & Summary
The petitioner, a banking company, sought to enforce security interest under the SARFAESI Act after acquiring a debt and underlying security from a non-banking financial company (NBFC) through a deed of assignment. The original creditor, respondent no.3, had extended financial assistance to respondent no.4 and secured the same by a mortgage over a flat. Following default, respondent no.3 obtained an arbitral award and later assigned the debt to the petitioner. The petitioner issued a demand notice under section 13(2) of the SARFAESI Act and initiated possession proceedings. Respondent nos.1 and 2, claiming ownership of the flat, challenged the action before the DRT, which allowed their securitisation application and directed restoration of possession, reasoning that the original creditor being an NBFC could not have invoked the SARFAESI Act, and consequently the assignee bank could not do so. The DRAT dismissed the petitioner's appeal. The High Court, in a writ petition, considered the core legal issue whether an assignee bank can rely on the SARFAESI Act when the assignor is an NBFC. Petitioners contended that the definition of 'debt' under section 2(ha) of the SARFAESI Act and section 2(g) of the RDDBFI Act includes assigned debts, and that the assignment created a valid security interest enforceable by the bank as a secured creditor, relying on RBI notifications that permit assignment as a banking activity. Respondents argued that section 13 measures can only be taken against a 'borrower' who obtained financial assistance from a bank or financial institution, and assignment from an NBFC does not confer such power, citing Deccan Chronicles case. The judgment excerpt does not contain the final decision or operative directions.
Issue of Consideration
Whether the Bank to whom a debt has been assigned by the Non-Banking Financial Corporation (NBFC) is entitled to adopt proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)?
Law Points
- assignment of debt including underlying security creates security interest
- definition of debt under SARFAESI Act includes assigned debts
- secured creditor status does not depend on original creditor's eligibility
- RBI notification permits assignment as banking activity
Case Details
2015 LawText (BOM) (07) 153
Writ Petition No. 722 of 2015
Ms. Rajani Iyer, Sr. Counsel with Mr. Rafeeque Peermohidin, Mr. Nikhil Rajani i/b V. Deshpande & Co. for the Petitioner; Mr. Umesh Shetty with Mr. Roshan D'Souza i/b Ms. Hina Mody for the Respondents
1. Trupti Sanjay Mehta, 2. Sanjay Vaichand Mehta, 3. Citi Financial Consumer Finance Ltd., 4. Amit Bipin Shah, 5. Bank of Baroda, Opera House Branch, 6. Reserve Bank of India, 7. The Senior Inspector of Police, Gamdevi Police Station, 8. Gita Smruti Premises CHS Ltd., 9. State of Maharashtra
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Nature of Litigation
Writ petition under Article 226 of the Constitution of India challenging orders of DRT and DRAT regarding applicability of SARFAESI Act to assignee bank.
Remedy Sought
Petitioner (Kotak Mahindra Bank) seeking declaration that assignee bank can adopt steps under SARFAESI Act and seeking to quash orders of DRT and DRAT.
Filing Reason
Petitioner's action under SARFAESI Act was challenged and DRT/DRAT held that petitioner could not invoke SARFAESI Act as original creditor was NBFC.
Previous Decisions
DRT allowed Securitisation Application of respondents 1 and 2, directing petitioner to handover possession. DRAT dismissed petitioner's appeal.
Issues
Whether the Bank to whom a debt has been assigned by the Non-Banking Financial Corporation (NBFC) is entitled to adopt proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)?
Submissions/Arguments
Petitioner argued that bank as assignee can enforce security under SARFAESI Act as definitions of debt and security interest support assignment, and assignment is a permissible banking activity under RBI notification.
Respondents argued that Section 13 SARFAESI Act can be invoked only against borrower who obtained financial assistance from bank/financial institution, and assignee bank cannot recover under SARFAESI for debt originally granted by NBFC.
Judgment Excerpts
whether the Bank to whom a debt has been assigned by the Non-Banking Financial Corporation (NBFC) is entitled to adopt proceedings under the the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act, 2002 (SARFAESI, Act)?
the Bank which is otherwise eligible to have recourse to the provisions of the SARFAESI Act for enforcement of securities, would be debarred from enforcing the security interest assigned to it by a NBFC.
assignment was a permitted banking activity in law.
Procedural History
Original creditor (Citi Financial Consumer Finance Ltd.) granted financial assistance to respondent no.4, secured by mortgage of flat. On default, obtained arbitral award on 31/07/2010. By Deed of Assignment dated 18/07/2012, assigned debt and security to petitioner Kotak Mahindra Bank. Petitioner issued notice under section 13(2) SARFAESI Act on 03/07/2013. Filed application under section 14 before CMM. During possession, respondent nos.1 and 2 claimed ownership and filed Securitisation Application No.39/2014 before DRT, Mumbai. DRT allowed application on 28/11/2014, directing restoration of possession. Petitioner filed Appeal No.235/2014 before DRAT, which dismissed the appeal on 20/01/2015. Petitioner filed Writ Petition No.722/2015 under Article 226. Hearing concluded on 28/04/2015, judgment pronounced on 16/07/2015.
Acts & Sections
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: 2(ha), 2(zd), 2(zc), 2(zf), 5, 13, 14, 2(f), 2(k), 2(l), 2(c), 2(m), 2(za), 2(v), 2(r), 2(ze)
- Recovery of Debts due to Banks and Financial Institutions Act, 1993: 2(g)
- Reserve Bank of India Act, 1934: Notification dated 13/07/2005
- Constitution of India: Article 226
- Companies Act: Not specified
