Bank Entitled To Proceed U/S 13 SARFAESI Act Notwithstanding That Debt Portfolio Was Assigned To It By NBFC: Bombay High Court

The Bombay High Court has held that a Bank, being a "secured creditor" within the meaning of section 2(zd) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), is entitled to initiate proceedings against a debtor under Section 13 thereof, notwithstanding the fact that the assignor of debt portfolio was not a "financial institution" at the material time.

 A bench of Chief Justice Dipankar Datta and Justice MS Karnik concluded that,

"initiation of action under Chapter III of the SARFAESI Act by the respondent no.1, being a "secured creditor" within the meaning of section 2(zd) thereof for the purpose of enforcing the security interest that was created earlier, is legally permissible. That the respondent no. 1 is the successor-in-interest of the respondent no.2, which was not a "financial institution" at the material time would make no difference insofar as consequence in law is concerned."

Respondent no. 1 was the Kotak Mahindra Bank which was assigned debt portfolio by Respondent no. 2, a non-banking financial company. Petitioner was a partnership firm which had obtained financial assistance from the respondent no. 2 upon creation of mortgage in respect of a flat, which was later classified as a non-performing asset by the Respondent no. 1, Bank.

The Bank had then proceeded to issued demand notice to the Petitioner under Section 13(2) of SARFAESI Act.

The notice was opposed by the petitioner primarily on the ground that the original lender was not a "financial institution" within the meaning of section 2(m) of the SARFAESI Act and, therefore, not a "secured creditor" within the meaning of section 2(zd) thereof. Hence, it was the petitioners' contention that since the respondent no.1 had stepped into the shoes of the respondent no. 2, the respondent no. 1 had no authority to proceed under section 13 of the SARFAESI Act.

Reliance was placed on Kotak Mahindra Bank Ltd. V/s. Trupti Sanjay Mehta & Ors., where it was held that a Bank to whom a debt has been assigned by a NBFC is not entitled to adopt proceedings under SARFAESI Act.

Nevertheless, the respondent no. 1 Bank proceeded to the Magistrate's Court and filed an application under section 14 of the SARFAESI Act. The application was allowed and an order was passed permitting Respondent no. 1 to take possession of the secured asset with the assistance of a public official.

Aggrieved, the Petitioner approached the High Court.

The High Court has held: 

"the action taken by the respondent no.1 to issue demand notice under section 13 (2) of the SARFAESI Act as well as to approach the magistrate under section 14 is legal and valid and it cannot be invalidated based on the decision of this Court in Kotak Mahindra Bank Ltd. (supra)."

The bench said that as the owner of the debt, the lender can always transfer its asset unless a law or the loan agreement prohibits the same. Such transfer in no manner affects any right or interest of the borrower.

In the instant case, the respondent no. 2 assigned its rights under a contract and its own asset, namely, the debt, to the respondent no.1. It is not the case of the petitioners that in so assigning, their rights as borrowers flowing from the loan agreement has in any manner been affected or even the asset affected, the Court noted. It further stated that the petitioner has not shown that the rights that the respondent no.2 assigned to the respondent no.1 were incapable of assignment, either under any law or under an agreement between the petitioners and the respondent no.2.

Next, it referred to the decision in M. D. Frozen Foods Exports Pvt. Ltd. and others Vs. Hero Fincorp Ltd., where by the Supreme Court held that Section 13 of the SARFAESI Act could be resorted to in respect of a debt which had arisen out of the loan agreement/mortgage created prior to enactment of the SARFAESI Act, give that the debt was alive at the time when the Act was brought into force.

Further, it referred to Indiabulls Housing Finance Limited Vs. M/s. Deccan Chronicle Holdings Limited and others. In this case, Indiabulls Financial Services Limited ('IBFSL') was the original lender which later on merged with the appellant (IHFL). The contention before the Court was that IBFSL not being a "financial institution" within the definition of the term in the SARFAESI Act on the date money was lent, it had no right to initiate action under the SARFAESI Act. However, the Supreme Court concluded that the arrangement would be classified as 'security arrangement' under Section 2(1)(zb); the agreements created 'security interest' under Section 2(1)(zf); and the appellant became 'secured creditor' within the meaning of Section 2(1)(zd) of SARFAESI Act."

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