Recovery Of Debt Of Bank Under SARFAESI Act Prevails Over Debts Under FEMA: Karnataka High Court

The Karnataka High Court recently held that provisions of the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act (SARFAESI) will override the provisions of the Foreign Exchange Management Act,(FEMA) which is a subsequent enactment, the debt of a secured creditor–Bank, would have priority and prevail over all other debts.

A single judge bench of Justice S R Krishna Kumar held thus while allowing the petition filed by Canara Bank and directed the Assistant Director of Enforcement Directorate to release a property which was mortgaged to the Bank by one Iqbal Ahmed. ED had seized the property under the provisions of the FEMA and passed the impugned order dated 31.03.2022 directing the seizure of the scheduled property and other properties of Ahmed.

The court relied on Section 26E of the SARFAESI Act and said “The provisions of the SARFAESI Act would prevail over the provisions of other earlier enactments, under which amounts are allegedly due to the Central Government.”

It added, “In the instant case, it cannot be gainsaid that the FEMA (a special law/Act) is an earlier enactment, while the SARFAESI Act (a special law/Act) is a later/subsequent enactment which would prevail over FEMA.”

The Bank contended that Section 37A of the FEMA was inserted on 09.09.2015, while the mortgage created in favour of the petitioner –Bank by Ahmed was on 20.05.2015. Thus Section 37A of FEMA was neither applicable nor could be invoked in relation to the schedule property.

Moreover, under Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 which applies to proceedings under the SARFAESI Act, the rights of the secured creditors are to be on priority and shall prevail over all other debts/dues.

The respondent contended that the alleged dues payable in respect of the property attached in the impugned order would not be covered under Section 26E of the SARFAESI Act and the contention of the petitioner was liable to be rejected. The petitioner can avail of alternate remedy before the Appellate Tribunal under Section 37A(5) of the FEMA Act.

Findings:

Referring to Section 26E of the SARFAESI Act the court said “SARFAESI Act, 2002 is a later Act/law, the same would prevail over the earlier Act/law, i.e., FEMA, 1999 and having regard to the language employed in Section 26E of the SARFAESI Act, the provisions contained therein would have a overriding effect over the provisions of the FEMA and the SARFAESI Act would prevail over FEMA.”

Then it held “The impugned order purporting to seize/attach the schedule property for alleged dues under FEMA are clearly without jurisdiction or authority of law, inasmuch as since the schedule property had already been mortgaged in favour of the petitioner – Bank by the 3rd respondent (Ahmed), prior to the impugned order, the 2nd respondent (ED) was neither entitled to nor empowered to pass the impugned order of seizure/attachment of the property which had already stood mortgaged in favour of the petitioner prior to the impugned order.”

It added that the impugned order passed by the 2nd respondent is illegal and arbitrary in addition to being without jurisdiction or authority of law and the same deserves to be quashed.

The court also rejected the contention of availing alternate remedies and said that the impugned order was without jurisdiction or authority of law and the same was not only illegal and arbitrary but also contrary to the provisions contained in the SARFAESI Act and RDBI Act.

Consequently, it said that the mere availability of a remedy by way of an appeal cannot be construed or treated as denuding this Court of its jurisdiction under Article 226 of the Constitution of India.

Accordingly, it allowed the petition.

Appearance: Senior Advocate Dhyan Chinnappa, for Advocate Shetty Vignesh Shivaram for Petitioner.

DSG H Shanthi Bhushan for R-1.

Advocate H Jayakar Shetty for R-2

Citation No: 2024 LiveLaw (Kar) 330

Case Title: Canara Bank AND Commissioner of Customs & Others

Case No: WRIT PETITION NO. 10895 OF 2023

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