2026 INSC 943 Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Civil Appeal No. 8531 of 2015

Kotak Mahindra Bank Limited … Appellant

versus

Trupti Sanjay Mehta and o thers … Respondents

with

Civil Appeal No. …………………... of 2026

(@ Special Leave Petition (C) No. 33113 of 2018)

&

Civil Appeal No. …………………... of 2026

(@ Special Leave Petition (C) No. 9399 of 2022)

J U D G M E N T

SANJAY KUMAR, J

1. The issue for consideration in these appeals is whether a bank, as

defined by Section 2(1)(c) of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest, Act, 2002

1

, can

take recourse to the provisions thereof for recovery of a debt assigned to

or taken over by it from a financial entity that was not governed by the

SARFAESI Act at the time of creation of such debt.

1

For short, ‘the SARFAESI Act’

2

2. In Civil Appeal No. 8531 of 2015, Kotak Mahindra Bank Limited

(

KMBL) is the appellant. City Financial Consumer Finance Limited ( CFCFL),

a non-banking financial company (

NBFC), respondent No. 3, was initially

not a ‘financial institution’ notified under Section 2(1)(m ) of the

SARFAESI

Act

. During that initial stage, Amit Bipin Shah, respondent No. 4, availed a

home loan from

it to acquire a residential flat from Trupti Sanjay Mehta

and her husband, Sanjay Walchand Mehta (together, ‘the Mehtas’),

respondent Nos. 1 and 2. He executed a loan agreement for ₹69,60,000/-

with

CFCFL and pursuant thereto, a sum of ₹66,72,360/- was said to have

been transferred by

CFCFL to the Mehtas. However , Amit Bipin Shah failed

to repay his debt to

CFCFL leading to arbitration proceedings, whereupon

he was directed to pay a sum of ₹75,30,872/- to

CFCFL with interest

thereon, vide Award dated 31.07.2010.

3. While so,

KMBL took over this loan account from CFCFL on

13.07.2012.

KMBL then initiated proceedings under the SARFAESI Act by

issuing a demand notice under Section 13(2) thereof on 03.07.2013. As

per the said notice, Amit Bipin Shah was liable to pay a sum of

₹1,10,39,111/- as on 02.07.2013 along with interest thereon. Thereafter,

in exercise of power under Sections 13(4) and 14 of the

SARFAESI Act,

KMBL secured order dated 11.07.2014 from the learned Chief Metropolitan

Magistrate, Mumbai, enabling it to take physical possession of the

secured asset, viz., the residential flat.

KMBL claims that, at the time of

3

taking possession, it found that the Mehtas were still in possession thereof

despite having sold the property to Amit Bipin Shah.

4. The Mehtas challenged the measures taken by

KMBL by filing

Securitisation Application (S.A.) No. 39 of 2014 before the Debts

Recovery Tribunal-II, Mumbai (

DRT). The main ground urged by them was

that

KMBL had no right to invoke the provisions of the SARFAESI Act, being

the assignee of

CFCFL whose debt was not covered thereby. Upholding

their contention, the

DRT delivered judgment dated 28.11.2014, declaring

that

KMBL was not entitled to invoke the SARFAESI Act to recover the debt

taken over by it from

CFCFL and directed restoration of possession of the

flat to the Mehtas. Aggrieved thereby,

KMBL filed Appeal No. 335 of 2014

before the Debts Recovery Appellate Tribunal, Mumbai. However, by oral

judgment dated 20.01.2015, the Appellate Tribunal dismissed the appeal.

Challenging these decisions,

KMBL filed WP No. 722 of 2015 before the

Bombay High Court. By judgment dated 16.07.2015, a Division Bench

affirmed the view taken by the

DRT and the Appellate Tribunal and

dismissed the writ petition, leading to the filing of the present appeal .

5. By order dated 10.08.2015, this Court directed status quo with

regard to possession of the flat, obtaining as on that date, to be

maintained. However, by its later order dated 24.08.2015, this Court

directed the Mehtas to deposit a sum of ₹63,89,814/- with

KMBL within six

months, without prejudice to the rights and contention of the parties, and

4

upon such deposit, KMBL was directed to handover possession of the flat

to them. This order was not acted upon as the Mehtas did not make the

deposit. By order dated 22.09.2015, this Court stayed the operation of the

impugned judgment dated 16.07.2015 at the behest of the Indian Banks

Association, which later came on record as respondent No.10. Thereafter,

on 20.04.2017, this Court accepted the offer of the Mehtas that they would

deposit ₹40 lakh with

KMBL within six weeks and directed KMBL to restore

possession of the flat to them upon their doing so. It was made clear that

this was an interim arrangement, subject to final adjudication of this

appeal, and was without prejudice to the contentions raised t herein. The

Mehtas were directed not to create any third party interests over the flat

and to deposit the original documents in their possession with the Registry

of this Court. Pursuant thereto, the Mehtas deposited ₹40 lakh with

KMBL

on 30.05.2017 and certain documents with the Registry.

KMBL handed

over possession of the flat to the Mehtas on 02.06.2017. We are informed

that the Mehtas are in possession thereof as on date. At this stage, we

may also note their contention that Amit Bipin Shah was never conveyed

title over the flat and that they continue to be the owners thereof.

6. In the appeal arising out of SLP (C) No. 33113 of 2018, the facts

reveal that one Manohar Govind Sable; his son, Anil Manohar Sable; and

his daughter-in-law, Jayashree Anil Sable, availed two housing loans of

₹28,50,000/- and ₹13,36,000/- respectively from

CFCFL on 25.02.2009.

5

Manohar Govind Sable died on 30.05.2011. Anil Manohar Sable and

Jayashree Anil Sable (together, ‘the Sables’), remained in the picture.

Upon their default in repaying the loan,

CFCFL initiated arbitration

proceedings against them, culminating in the ex parte Award dated

23.04.2012, which held the Sables liable to pay a sum of ₹43,57,965/- to

CFCFL with future interest. Execution proceedings initiated by CFCFL

before the learned Principal District Judge, Nagpur, were not followed up,

resulting in the dismissal thereof on 27.11.2017, for want of prosecution.

Meanwhile, on 09.04.2013,

KMBL took over the Sables’ loan account from

CFCFL under a deed of assignment. KMBL thereupon issued them a

demand notice under Section 13(2) of the

SARFAESI Act on 13.11.2013.

The Sables responded, vide letter dated 28.01.2014, seeking six months’

time to settle their account. Their failure resulted in symbolic possession

of their secured property being taken by

KMBL on 25.06.2014, under

Section 13(4) of the

SARFAESI Act. Aggrieved thereby, the Sables filed a

securitisation application on 10.09.2014 before the Debts Recovery

Tribunal, Nagpur. They then filed M.A. No. 61 of 2014 therein seeking

condonation of the delay of 32 days in its filing. According to

KMBL, the

Debts Recovery Tribunal dismissed the application on 23.11.2017 and the

order attained finality as the Sables never challenged the same .

7. Meanwhile,

KMBL filed an application in Case No. 14 of 2015 before

the learned Additional District Magistrate, Nagpur, under Section 14 of the

6

SARFAESI Act,

seeking to take possession of the secured property. Late

Manohar Govind Sable was also shown as a party therein, as

KMBL was

unaware of his death . By order dated 03.10.2018, the learned Additional

District Magistrate, Nagpur, directed the Executive Magistrate, Nagpur

City, to take possession of the secured property and hand over the same

to the authorised representative of

KMBL. As this Court was already seized

of

KMBL’s appeal, involving a debt taken over by it from CFCFL, the Sables

approached this Court directly, by way of the present case, assailing the

order dated 03.10.2018 of the learned Additional District Magistrate,

Nagpur. By order dated 04.01.2019, this Court recorded

KMBL’s

undertaking that it would not take coercive steps against the Sables. They,

therefore, continue to remain in possession of the secured property.

8. In the appeal arising out of SLP (C) No. 9399 of 2022, the appellants

are Poorti Rent a Car and Logistics Pvt. Ltd. and its D irectors, Jagdish B.

Khurana and Sucheta J. Khurana. They availed a loan of ₹2.98 crores

from

CFCFL in February, 2009. This loan was declared a non-performing

asset by

CFCFL in November/December, 2009. The loan account was

taken over by

KMBL from CFCFL under deed of assignment dated

18.07.2012. Thereupon,

KMBL invoked the provisions of the SARFAESI Act

and issued them a notice under Section 13(2) thereof on 22.04.2014. The

appellants responded by disputing

KMBL’s power to take recourse to the

provisions of the

SARFAESI Act. However, acting at the behest of KMBL, the

7

learned Chief Metropolitan Magistrate, Esplanade, Mumbai, passed an

order on 01.10.2014, under Section 14 of the

SARFAESI Act, directing

delivery of possession of the appellants’ property to

KMBL. Assailing the

said order, the appellants filed WP No. 11371 of 2014 before the Bombay

High Court. By judgment dated 24.02.2022, a Division Bench dismissed

the appellants’ writ petition on the ground that the issue stood decided

against them by the decisions of this Court in M.D. Frozen Foods

Exports Private Limited and others vs. Hero Fincorp Limi ted

2

and

Indiabulls Housing Finance Limi ted vs. Deccan Chronicle Holdings

Limited and others

3

. The Bench held that the co-ordinate Bench’s

judgment in the Mehtas’ case stood impliedly overruled thereby.

Aggrieved thereby, the appellants approached this Court. Though notice

was ordered on 23.05.2022 on their prayer for interim relief, this Court was

informed on 03.06.2022 that possession of the property was taken over

by

KMBL on 26.05.2022. The appellants remained unsuccessful in their

attempt to recover possession thereafter.

KMBL issued a notice with regard

to sale of the said property on 22.07.2022. We are informed that the

secured property was sold in the year 2023.

9. At this stage, it would be apposite to note the scheme and structure

of the

SARFAESI Act. The Statement of Objects and R easons therein

2

(2017) 16 SCC 741

3

(2018) 14 SCC 783

8

records that the financial sector is one of the key drivers in India’s efforts

to achieve success in rapidly developing the economy. Noting that banks

and financial institutions in India, unlike international banks, do not have

the power to take possession of securities and sell them, it was observed

that our existing legal framework relating to commercial transactions has

not kept pace with changing commercial practices and financial sector

reforms. It was further observed that this had resulted in slow recovery of

defaulting loans and in mounting levels of non-performing assets of banks

and financial institutions. Reference was made to the various committees

constituted by the Central Government for examining banking sector

reforms, which had suggested enactment of a new legislation for

securitisation and for empowering banks and financial institutions to take

possession of securities and sell them without intervention of the Court. It

was on this basis that the ordinance, which preceded the

SARFAESI Act,

was promulgated on 21.06.2002. The provisions of the ordinance aimed

at enabling banks and financial institutions to realise long-term assets,

manage problems of liquidity and asset liability mismatches so as to

improve recovery, by exercising powers to take possession of securities,

sell them and reduce non-performing assets by adopting measures for

recovery or reconstruction. The ordinance was replaced by a Bill and upon

the same being passed by both h ouses of Parliament, the

SARFAESI Act

came into force with effect from 21.06.2002.

9

10. Section 2 of the SARFAESI Act contains definitions and states that,

unless the context otherwise requires, for the purposes of the sa id Act, the

terms used therein would be as defined under Section 2(1)(a) to 2(1)(zj)

thereof. Section 2(1)(c) defines ‘bank’ to mean a banking company; or a

corresponding new bank; or the State Bank of India; or a subsidiary bank;

or a multi-State co-operative bank; or such other bank which the Central

Government may, by notification, specify for the purposes of the

SARFAESI

Act

. Section 2(1)(d) defines ‘banking company ’ to have the meaning

assigned to it in Section 5(c) of the Banking Regulation Act, 1949. Section

2(1)(f) defines ‘borrower ’ to mean, amongst other things, a person who

has been granted financial assistance by a bank or financial institution or

who has given any guarantee or created any mortgage or pledge as

security for the financial assistance granted by any bank or financial

institution and includes a person who becomes a borrower of an asset

reconstruction company, consequent upon acquisition by it of any rights

or interest of any bank or financial institution in relation to such financial

assistance. Section 2(1)(ha) earlier defined ‘debt’ to have the meaning

assigned to it by Section 2(g) of the Recovery of Debts due to Banks and

Financial Institutions Act, 1993

4

(renamed as Recovery of Debts and

Bankruptcy Act, 1993, with effect from 01.12.2019) which, to the extent

relevant, reads thus:

4

For short, ‘the Act of 1993’

10

“debt” means any liability (inclusive of interest) which is claimed as due

from any person or a pooled investment vehicle as defined in clause (da)

of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of

1956) by a bank or a financial institution or by a consortium of banks or

financial institutions during the course of any business activity

undertaken by the bank or the financial institution or the consortium under

any law for the time being in force, in cash or otherwise, whether secured

or unsecured, or assigned, or whether payable under a decree or order

of any civil court or any arbitration award or otherwise or under a

mortgage and subsisting on, and legally recoverable on the date of …..’

11. Section 2(ha) of the SARFAESI Act was thereafter amended, with

effect from 01.09.2016, and the provision now reads as under:

‘S.2(1)(ha): “debt” shall have the meaning assigned to it in clause (g) of

section 2 of the Recovery of Debts Due to Banks and Financial

Institutions Act, 1993 (51 of 1993) and includes—

(i) unpaid portion of the purchase price of any tangible asset given on hire

or financial lease or conditional sale or under any other contract;

(ii) any right, title or interest on any intangible asset or licence or assignment

of such intangible asset, which secures the obligation to pay any unpaid

portion of the purchase price of such intangible asset or an obligation

incurred or credit otherwise extended to enable any borrower to acquire

the intangible asset or obtain licence of such asset; ’

12. Section 2(1)(k) of the SARFAESI Act defines ‘financial assistance’ to

mean, amongst other things, any loan or advance granted or any other

credit facility extended by any bank or financial institution, including funds

provided for the purpose of acquisition of any tangible asset on hire or

financial lease or conditional sale or under any other contract or obtaining

assignment or licence of any intangible asset or purchase of debt

securities. Section 2(1)(m) of the

SARFAESI Act defines a ‘financial

institution’ and reads thus:

‘S.2(1)(m) “financial institution” means -

(i) a public financial institution within the meaning of section 4A of the

Companies Act, 1956 (1 of 1956);

11

(ii) any institution specified by the Central Government under sub- clause (ii)

of clause (h) of section 2 of the Recovery of Debts Due to Banks and

Financial Institutions Act, 1993 (51 of 1993);

(iii) the International Finance Corporation established under the

International Finance Corporation (Status, Immunities and Privileges) Act,

1958 (42 of 1958);

(iiia) a debenture trustee registered with the Board and appointed for

secured debt securities;

(iiib) asset reconstruction company, whether acting as such or managing a

trust created for the purpose of securitisation or asset reconstruction, as the

case may be;

(iv) any other institution or non- banking financial company as defined in

clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934),

which the Central Government may, by notification, specify as financial

institution for the purposes of this Act;’

13. Section 2(1)(o) of the SARFAESI Act defines ‘non-performing asset’ to

mean an a sset or account of a borrower, which has been classified by a

bank or financial institution as a sub-standard, doubtful or loss asset, such

classification having taken place as per the guidelines referred to in

clauses (a) and (b) thereof . Section 2(1)(zb) of the

SARFAESI Act defines

‘security arrangement’ to mean an agreement, instrument or other

document or arrangement under which security interest is created in

favour of the secured creditor, including the creation of mortgage by

deposit of title deeds with the secured creditor. Section 2(1)(zc) defines

‘secured asset’ to mean the property on which security interest is created

while Section 2(1)(zd) defines a ‘secured creditor ’. It reads as under:

‘S 2(1)(zd) “secured creditor” means -

(i) any bank or financial institution or any consortium or group of banks

or financial institutions holding any right, title or interest upon any

tangible asset or intangible asset as specified in clause (l);

12

(ii) debenture trustee appointed by any bank or financial institution; or

(iii) an asset reconstruction company whether acting as such or

managing a trust set up by such asset reconstruction company for

the securitisation or reconstruction, as the case may be; or

(iv) debenture trustee registered with “the Board and appointed” for

secured debt securities; or

(v) any other trustee holding securities on behalf of a bank or financial

institution,

in whose favour security interest is created by any borrower for due

repayment of any financial assistance.’

14. Section 2(1)(zf), an inclusive definition of ‘security interest’, states

that it means right, title or interest of any kind, other than those specified

in Section 31, upon property created in favour of the secured creditor and

also includes the interests detailed in clauses (i) and (ii) thereunder.

15. Chapter II of the

SARFAESI Act, titled ‘Regulation of Securitisation and

Reconstruction of Financial Assets of Banks and Financial Institutions’,

provides for registration of asset reconstruction companies. Section 5

therein deals with acquisition of rights or interest in financial assets by

asset reconstruction companies from any bank or financial institution and

Section 5(2) states that if a bank or financial institution is the lender in

relation to any financial assets acquired by an asset reconstruction

company under Section 5(1), such company shall, on such acquisition, be

deemed to be the lender and all the rights of such bank or financial

institution shall vest in such company in relation to such financial assets.

16. This being the statutory milieu of the

SARFAESI Act, we may note that

the cases on hand turn on facts which do not fit squarely within the

13

framework thereof. Admittedly, as on the date of lending by the CFCFL and

creation of secured debts in its favour by its borrowers,

CFCFL was not a

‘financial institution’ within the meaning of Section 2(1)(m) of the

SARFAESI

Act. T

he notification by the Central Government declaring it to be so under

Section 2(1)(m)(iv ) was issued only on 27.08.2018. However,

KMBL, a

banking company, that qualified as a ‘bank’ under Section 2(1)(c) of the

SARFAESI Act, took over those loan accounts from CFCFL long before it was

notified as a ‘ financial institution’ under Section 2(1)(m)(iv) thereof.

Having

acquired such loan accounts, could

KMBL take recourse to the SARFAESI

Act

for recovering the dues in relation to those loan accounts.

17. In this regard, as the Bombay High Court held in favour of

KMBL in

one instance, citing two decisions of this Court as squarely covering the

issue, it would be apposite to take note of those decisions. In M.D. Frozen

Foods (supra), this Court was considering a situation where the loan

availed by the borrower was from a

NBFC which thereafter came to be

notified as a ‘financial institution’ under Section 2(1)(m)(iv) of the

SARFAESI

Act

. The issue before this Court was whether the NBFC was entitled

thereupon to take recourse to the provisions of the

SARFAESI Act for

recovery of that loan. The specific question framed by this Court was

whether the

NBFC could invoke the SARFAESI Act when it was notified as a

‘financial institution’ under Section 2(1)(m) after the account became a

non-performing asset. It was noted that the

SARFAESI Act was brought into

14

force to solve the problem of recovery of large debts in non-performing

assets and thus, the very rationale for the said Act to be brought into force ,

was to provide an expeditious procedure when there was a security

interest. It was observed that the

SARFAESI Act would apply to all claims

that were ‘alive ’ at the time that it was brought into force and, therefore,

be it in relation to the respondent

NBFC or other NBFCs, it would be

applicable from the date when it was made applicable to them. It was

noted that till the

NBFC was not a ‘financial institution’ within the meaning

of Section 2(1)(m) of the

SARFAESI Act, it was not a ‘secured creditor’ as

defined under Section 2(1)(zd) thereof and, thus, could not invoke its

provisions but the right to proceed under the

SARFAESI Act accrued once

the notification was issued.

18. Further, this Court held that the definition clauses clearly conveyed

the legislative intent that the

SARFAESI Act applied to all existing loan

agreements, irrespective of whether or not the lender was a notified

‘financial institution’ on the date of execution of the agreement with the

borrower. Pointing out that the scheme of the

SARFAESI Act sets out an

expeditious procedural methodology enabling a bank to take possession

of secured property for non-payment of dues without judicial intervention,

this Court held that the mere fact that a more expeditious remedy wa s

provided thereunder did not mean that it is substantive in character or that

it created an altogether new right. It was observed that to accept such an

15

argument would imply that borrowers have an inherent right to delay

enforcement against a security interest. It was observed that the date on

which a debt is declared to be a non-performing asset would have no

impact as the

SARFAESI Act would become applicable qua all debts owing

and live when the

SARFAESI Act became applicable to the NBFC.

19. In Indiabulls (supra), the issue was whether the

SARFAESI Act would

apply when Indiabulls Financial Services Limited (IFSL), the

NBFC which

disbursed the loan to the borrower in the year 2012, was then merged with

its sister concern, Indiabulls Housing Financial Limited (IHFL), and upon

sanction of the said merger, the assets and liabilities of IFSL stood vested

in IHFL. Pursuant thereto, the borrowers of IFSL became the borrowers

of IHFL. IFSL was not notified as a ‘financial institution’ under Section

2(1)(m) of the

SARFAESI Act, whereas IHFL was. The question was whether

IHFL, which had taken over the assets of IFSL, could invoke the

SARFAESI

Act

for recovery of the loans inherited by it upon the merger. It was argued

on behalf of the borrower, respondent No.1 therein, that it was not granted

financial assistance by a ‘bank’ or ‘financial institution’, within the meaning

of the

SARFAESI Act, and the loan agreements entered into by it with IFSL

could not be classified as ‘security arrangements’ within the meaning of

Section 2(1)(zb). I t was also contended that respondent No.1 therein

could not be treated as a ‘borrower’, as defined under Section 2(1)(f) of

the

SARFAESI Act.

16

20. Having considered these contentions, this Court opined that the

entire edifice was built on pleas which were squarely answered in M.D.

Frozen Foods (supra) and there was no reason to take a different view

therefrom. This Court observed that M.D. Frozen Foods (supra) made it

clear that a successor-in-interest would be entitled to take recourse to the

SARFAESI Act even if the original lender was not a ‘financial institution’

covered by the Act

at the relevant time. This Court found force in the

contention urged by IHFL that the debt, with the underlying security, was

an asset of IFSL which had the right to transfer/assign the same to any

person, without seeking the consent of the borrower. As IHFL was the

assignee of such debt through the process of merger, this Court opined

that there would not be any difference from M.D. Frozen Foods (supra),

as far as the consequences in law were concerned and that M.D. Frozen

Foods (supra) would apply with all force. This Court, accordingly, held that

respondent No. 1 therein would be a borrower within the meaning of

Section 2(1)(f) of the

SARFAESI Act and its arrangement qualified as a

‘security arrangement’ under Section 2(1)(zb), as the same created a

‘security interest’ under Section 2(1)(zf) and IFHL became a ‘secured

creditor’ within the meaning of Section 2(1)(zd) of the

SARFAESI Act.

21. Presently, the issue is whether a loan/debt secured by a mortgage

in favour of a

NBFC which was not, at that point of time, a ‘financial

institution’ under Section 2(1)(m) of the

SARFAESI Act, would get converted

17

into a ‘secured debt’ thereunder if the said loan/debt is acquired by a ‘bank’

under Section 2(1)(c) thereof and whether the said bank could, thereupon,

initiate measures under the

SARFAESI Act for recovery of that loan/debt.

22. We may also note that, in so far as the Mehtas’ S.A. No.39 of 2014

is concerned, the

DRT did not examine the matter on merits as it held

against

KMBL at the very threshold and the issues raised therein were

never looked into. It was submitted on behalf of the Mehtas that, in the

event this Court holds in favour of

KMBL, the securitization application filed

by them may be restored for consideration of the other issues raised

therein on their own merits. It was pointed out that, pursuant to the order

passed by this Court, the Mehtas deposited ₹40 lakh with

KMBL and it is

stated that they are willing, without prejudice to their rights and

contentions, to deposit a further sum of ₹25 lakh with

KMBL, subject to the

final orders that would be passed in their securitization application.

23. Further, we find that the Mehtas filed applications seeking to implead

Punjab National Bank and the Assets Reconstruction Company of India

Limited on the ground that Amit Bipin Shah availed financial assistance

from these entities also on the strength of his agreement of sale with them .

However, we are not inclined to go into those aspects. The impleadment

applications are, therefore, liable to be dismissed.

24. As regards the loan accounts of the Sables,

KMBL pointed out that

their loan agreements with

CFCFL authorized the assignment of their debts

18

and entitled the assignee to exercise all the rights of the original lender.

KMBL would, therefore, contend that it is not open to the Sables to dispute

its right to enforce the ‘security interest’ created by them for recovery of

its dues pursuant to such assignment.

KMBL claims that their outstanding

dues as on 21.07.2026 stood at ₹1,55,02,922/-.

25. Poorti Rent A Car and Logistics Pvt. Ltd. and its Directors contend

that ‘banks/financial institutions’ covered by the

SARFAESI Act which

acquire non- performing assets of entities not covered there by cannot be

permitted to enforce their acquired security interests under the provisions

thereof. They would argue that doing so would be without jurisdiction and

that the measures initiated by

KMBL pursuant to acquisition of such debts

are liable to be quashed. They assert that the

SARFAESI Act was held to

constitutionally valid in Mardia Chemicals Ltd. and others vs. Union of

India and others

5

, because of the adverse impact of non-performing

assets on the economy as a whole and banks cannot be permitted to

acquire such non-performing assets so as to invoke the recovery

mechanisms thereunder. They point out that a harsh and lopsided

recovery mechanism is prescribed under the

SARFAESI Act, empowering

‘banks/financial institutions’ to enforce a security interest without judicial

intervention and such drastic provisions were held to be valid, primarily on

the ground that such non-performing assets adversely impacted the

5

(2004) 4 SCC 311

19

economy. They would argue that, when the primary objective behind the

SARFAESI Act was to reduce non-performing assets impacting the

economy in the context of the ‘ banks/financial institutions’ recognized

thereunder, permitting such ‘banks/financial institutions ’ to deliberately

acquire non-performing assets from entities not governed by the

SARFAESI

Act

would run contrary to the very basis on which the validity of the said

enactment was upheld. Reference was made, in this regard, to ‘non-

performing asset’ as defined under Section 2(1)(o) and ‘borrower’ under

Section 2(1)(f) and ‘security arrangement’ under Section 2(1)(zb) of the

SARFAESI Act, to contend that a non- performing asset would mean an

asset or account of a borrower classified by a ‘ bank’ or ‘financial institution’

as sub-standard, doubtful or loss asset and, therefore, at the time of such

classification, the ‘borrower’ as well as the ‘financial institution’ must

qualify as such under the provisions of the

SARFAESI Act.

26. We may note that, in Mardia Chemicals Ltd. ( supra), a 3-Judge

Bench of this Court upheld the validity of the

SARFAESI Act, except for

Section 17(2) thereof, which was held to be ultra vires . It was observed

that, for the financial assistance rendered to industries by financial

institutions, liquidity is essential, failing which there would be a blockade

of large sums of money, creating circumstances that retard economic

progress, followed by a large number of other consequential ill-effects.

Noting that liquidity of finances and flow of money is essential for any

20

healthy/growth-oriented economy, it was observed that what must kept in

mind is that the law should not be in derogation of the rights guaranteed

to the people under the Constitution and the procedure should also be fair,

reasonable and valid, though it may vary looking to the different situations

that need to be tackled and the object to be achieved. Noting that expert

committees had recommended having a law which provides a speedier

remedy for improvement of general financial flow of money necessary for

the economy of the country, the Bench observed that the

SARFAESI Act

was in public interest and individual interest had to be subservient to it. It

was held that, even if a few borrowers are affected here and there, that

would not impinge upon the Act’s validity,

which otherwise serves larger

interest. It was observed that though presumption is in favour of validity of

a legislation and it would not be declared unconstitutional lightly and, more

so, in matters relating to fiscal and economic policies resorted to in public

interest, but while resorting to such legislation it would be necessary to

see that the persons aggrieved get a fair deal at the hands of those who

have been vested with powers to enforce drastic steps to make recovery.

27. Reserve Bank of India (RBI), respondent No. 6 in Civil Appeal No.

8531 of 2015, is a statutory corporation constituted under Section 3 of the

Reserve Bank of India Act, 1934. It regulates and supervises commercial

and cooperative banks in the country in accordance with the provisions of

the Banking Regulation Act, 1949. RBI issued broad regulatory guidelines

21

on the purchase/sale of non-performing assets, vide Circular dated

13.07.2005, in exercise of powers conferred by Sections 21 and 35A of

the Reserve Bank of India Act, 1934. It addressed letter dated 13.07.2025

to all commercial banks; all India term-lending and refinancing institutions;

and all

NBFCs. Therein, it was stated that, in order to increase the options

available to banks for resolving their non-performing assets and to

develop a healthy secondary market for such non-performing assets,

where securitization companies and reconstruction companies are not

involved, it was decided to issue guidelines to banks on purchase/sale of

non-performing assets. This process was directed to be initiated with due

diligence and care, warranting existence of a set of clear guidelines which

should be complied with by all entities so that the process of resolving

non-performing assets by sale and purchase of such non-performing

assets proceeds on smooth and sound lines. The guidelines circular, in

the form of an annexure, was attached to the letter.

28. Before us, RBI stated that it had no objection to banks purchasing

non-performing assets from financial institutions and

NBFCs. It pointed out

that, in ICICI Bank Limited vs. Official Liquidator of APS Star

Industries Limited and others

6

, this Court held that assignment of debts

is a permissible activity under the Banking Regulation Act, 1949. Further,

this Court took note of the guidelines issued by the RBI, vide Circular

6

(2010) 10 SCC 1

22

dated 13.07.2005, and observed that the said guidelines have the

statutory force of law. This Court further observed that the RBI, by way of

these guidelines, allowed banks to engage in trading in non-performing

assets with the purpose of cleaning the balance sheets, so that they could

raise the capital adequacy ratio. It was held that all these would come

within the ambit of Section 21 of the Reserve Bank of India Act, 1934,

which enabled the RBI to frame policy in relation to advances to be

followed by banking companies.

29. RBI pointed out that it would be in the interest of the financial system

that banks are enabled to enforce security interests of non-performing

assets acquired by them from other institutions. It asserted that, if the

provisions of the

SARFAESI Act are interpreted in a restrictive manner, as

was done by the Bombay High Court in the impugned judgment dated

16.07.2015, it would result in a situation where an assignee bank would

not be able to take recourse to the provisions thereof for enforcing the

security interest on the default of a borrower. It pointed out that the rights

and liabilities of a borrower under a loan agreement would not be affected

by the fact that such loan account is assigned to a ‘bank ’, whereupon the

provisions of the

SARFAESI Act can be invoked for the purpose of effecting

recovery, as the borrower is liable, in any case, to return the dues of a

secured creditor and the assignee bank cannot be restrained from

resorting to the

SARFAESI Act for liquidating such dues.

23

30. We find that M.D. Frozen Foods (supra) and Indiabulls (supra)

turned more upon the identity of the financial entity rather than the change

in the status of the loan/debt

. However, the common factor is that the NBFC

in question, at the time it extended financial assistance to the borrowers

and accepted security for repayment thereof, as in the present cases, was

not a ‘financial institution’ notified under Section 2(1)(m) of the

SARFAESI

Act

. In M.D. Frozen Foods (supra), the same NBFC thereafter came to be

notified as a ‘financial institution ’ under Section 2(1)(m) of the

SARFAESI

Act

while the NBFC in Indiabulls (supra) merged with a ‘ financial institution’

covered by Section 2(1)(m) of the

SARFAESI Act. The issue for

consideration in both those cases was whether in relation to such a debt,

which was not a ‘secured debt’ covered by the

SARFAESI Act at the time of

its inception, in the hands of

NBFCs, that were not ‘financial institutions’

covered by the

SARFAESI Act at that time, but which thereafter came to be

held by

NBFCs notified under Section 2(1)(m) of the SARFAESI Act, such

NBFCs

could invoke the provisions thereof to recover those debts.

31. The situation obtaining presently is a little different, as stress is more

upon the legal status of a loan/debt backed by security taken from a

NBFC,

not covered by Section 2(1)(m) of the

SARFAESI Act at the time of inception

of such loan/debt, when the said loan/ debt is taken over thereafter by a

‘bank’ covered by Section 2(1)(c) thereof. The argument advanced before

us is that when such a debt was not one covered by the

SARFAESI Act at

24

the time of its creation, it would not assume the status of a ‘secured debt’

thereunder merely because it was then assigned to or taken over by a

‘bank’ covered by the

SARFAESI Act. Interestingly, CFCFL, the NBFC which

extended the loans in these cases, was notified as a ‘financial institution’

under Section 2(1)(m)(iv) of the

SARFAESI Act on 27.08.2018. Had the

loans in question remained with

CFCFL, the situation would have

straightaway been covered by the edict in M.D. Frozen Foods (supra)

and the loans would have been recoverable by it under the provisions of

the

SARFAESI Act. The question is whether the taking over of such loans

prior to that date by

KMBL, a ‘bank’, under Section 2(1)(c) of the SARFAESI

Act,

disentitled it from invoking the provisions thereof for effecting recovery.

32. The

SARFAESI Act facilitates liquidation of non-performing assets and

bad debts by ‘banks ’ and ‘financial institutions’ so as to aid in the growth

of the economy. No doubt, it provides for harsh measures in that regard,

minimizing the scope of judicial intervention to a great extent. However,

the objective of the enactment cannot be lost sight of. 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

25

quicker and easier r ecovery 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. As pointed

out by the RBI, every borrower is bound to honour his commitment and

repay his loan along with the interest payable thereon. There can be no

deviating from this legal and moral obligation of a borrower, irrespective

of the mode of recovery in the event of default by such borrower in

repaying the loan. The fundamental premise on which the borrowers

before us seek to escape the rigours of the

SARFAESI Act is, therefore,

without legal foundation.

33. Though M.D. Frozen Foods (supra) and Indiabulls (supra) looked

at the applicability of the the

SARFAESI Act from a different angle, the core

issue in those cases and the present appeals is the same, i.e., whether a

loan/debt which was not covered by the

SARFAESI Act in its inception could

change its status thereafter, whereby its provisions would be applicable in

the context of recovery thereof. Those decisions were concerned more

with the identit ies of the entities which gave the loans and thos e that

thereafter invoked the provisions of the

SARFAESI Act, whereas in the

present appeals, we are more concerned with the status of the loan/debt

itself. However, semantics aside, the issue is the same, i.e., applicability

of the

SARFAESI Act to a loan/debt, which was originally not a loan/debt

26

covered thereby. In this context, the observations made by this Court in

the aforestated decisions clinch the issue.

34. In M.D. Frozen Foods (supra), this Court observed that the

definition clauses in the

SARFAESI Act clearly conveyed the legislative

intent that it applies to all existing loan agreements, irrespective of

whether or not the lender was a notified ‘financial institution’ on the date

of execution of the agreement with the borrower. It was also observed that

the date on which the loan/debt is declared to be a non-performing asset

has no relevance, as the

SARFAESI Act would become applicable qua all

loans/debts ‘owing and live’ when the Act became applicable.

35. In Indiabulls (supra), this Court went further and vetoed the

argument of the borrower that it was not granted financial assistance by a

‘financial institution’ within the meaning of

SARFAESI Act and, therefore, its

loan agreement could not be classified as a ‘ security arrangement’ The

earlier decision in M.D. Frozen Foods ( supra) was applied, observing that

it was held therein that a successor-in-interest to the loan/debt would be

entitled to take recourse to the

SARFAESI Act even if the original lender was

not a ‘financial institution’ covered by the said Act at the relevant time.

36. The decisions in M.D. Frozen Foods (supra ) and Indiabulls

(supra), therefore, put it beyond the pale of doubt that once a claim is ‘live

and owing’ as on the date of coming into force of the

SARFAESI Act, t he

provisions thereof would be available, as and when it becomes applicable

27

to the institution holding that loan account. By the same logic, when the

institution 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. 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.

37. Further, in the light of the earlier decisions of this Court, it is not open

to the borrowers to dissect and nit-pick the definitions in Section 2(1) of

the

SARFAESI Act to claim that their loans/ debts cannot be subjected to

recovery measures thereunder. The purposive interpretation of such

definitions by this Court in the earlier judgments forecloses any such

argument being advanced once again.

38. On the above analysis, we find that the Bombay High Court was not

correct in taking the view that it did in the case of the Mehtas. Further, we

may note that the High Court held in their favour and against

KMBL at the

threshold. We have now held to the contrary but we are informed that

28

other factual and legal issues raised by the Mehtas in their securitisation

application, S.A. No. 39 of 2014, were never considered on merits. It

would, therefore, be appropriate to allow them an opportunity to urge all

such issues now. In the light of the fair offer made by them, we allow them

to do so by depositing a further sum of ₹25 lakh with KMBL within eight

weeks from today. This deposit shall be without prejudice and shall abide

by the final decision in their securitisation application. The judgment dated

16.07.2015 of the Bombay High Court along with the underlying

judgments are accordingly set aside. S.A. No. 39 of 2014 shall stand

restored to the file of the Debts Recovery Tribunal, Nagpur , for

consideration in accordance with law. The original documents submitted

by the Mehtas shall be returned to them by the Registry under proper

acknowledgement and in accordance with due procedure.

39. Insofar as the Sables are concerned, we hold that

KMBL was legally

entitled to invoke the provisions of Section 14 of the

SARFAESI Act to take

over the physical possession of the secured property. Further, as their

securitisation application wa s already dismissed on the ground of delay, it

is for them to take recourse to legal remedies in accordance with law as

and when a fresh cause of action arises.

40. As regards the case of Poorti Rent a Car and Logistics Private

Limited, the Bombay High Court was fully justified in holding that the issue

stood squarely covered by the decisions of this Court in M.D. Frozen

29

Foods (supra) and Indiabulls (supra). Further, as the secured property

has already been sold in the year 2023, we need say no more .

41. In consequence, Civil Appeal No. 8531 of 2015 is allowed and the

other two appeals are dismissed.

Pending impleadment/intervention applications are also dismissed.

Parties shall bear their respective costs.

..............................., J.

SANJAY KUMAR

..............................., J.

SANJEEV SACHDEVA

September 02, 2026

New Delhi.