Court denies assignee bank benefit of SARFAESI Act

The assignment of debt by banks and other financial institutions has become quite common. Bombay High Court recently adjudicated upon an interesting aspect of law in relation to one such assignment in the case of Kotak Mahindra Bank Ltd v Trupti Sanjay Mehta and Others.

Facts of the case

In this case, a non-banking financial company (NBFC) had sanctioned a loan to an entity that defaulted in meeting its payment obligations in relation to the loan. Upon the default, the NBFC invoked the arbitration clause in the financing document and the arbitral tribunal ordered the borrower to repay the loan to the NBFC in accordance with the terms stipulated. The NBFC subsequently assigned the debt to a bank via a deed of assignment. The assignee invoked the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), to recover the outstanding amount and took possession of the flat which was provided as security for the loan.

The borrower filed an application before the Debt Recovery Tribunal, claiming that since the original lender (i.e. the NBFC) was not entitled to invoke the provisions of the SARFAESI Act, the assignee bank was also not entitled to take action under the act. The tribunal allowed the application and directed the bank to hand over possession of the flat. The bank filed an application before the Debt Recovery Appellate Tribunal, which was dismissed. Accordingly, the bank filed a writ petition before Bombay High Court.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.