Brief Overview:

In-scope status at the time of enforcement is what matters. Secured debt that originated outside the SARFAESI regime is not fatal if, at the time of enforcement, the creditor is covered by SARFAESI. This decision of the Supreme Court does away with a long-standing hurdle qua assigned loan portfolios where the original lender was not covered. It reinforces the ability of banks to rely on SARFAESI remedies for acquired secured assets.

Technical Details:

SARFAESI is a self help remedy for secured creditors covered by this law. Enforcement of collateral (other than pledges) is then a matter of process with well defined guardrails. It avoids having to rely on courts for collateral enforcement. As a result of this ruling:

1) Enforcement rights follow the present holder: A secured debt need not be SARFAESI covered at origination. Once assigned to a bank or other SARFAESI-covered creditor, the assignee may invoke SARFAESI notwithstanding the originator’s status.

2) Jurisprudential thread strengthened: Building on M.D. Frozen Foods Exports (P) Ltd. v. Hero Fincorp Ltd., (2017) 16 SCC 741.pdf and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., (2018) 14 SCC 783.pdf, the court confirmed that SARFAESI enforceability can attach to a live secured debt at a later stage, once it is assigned to (and currently held by) a SARFAESI-covered creditor.

3) Bombay High Court view overruled: The earlier Bombay High Court ruling, which had taken a restrictive view against SARFAESI enforcement by the assignee bank, has been set aside by the Supreme Court.

4) Secured debts can acquire SARFAESI attributes: On acquisition by a covered institution, the loan becomes a SARFAESI-enforceable secured debt.

5) Origination-based objections rejected: Borrowers cannot resist SARFAESI merely because the original lender was outside the statute.

JC takeaway:

1) Secondary NPA market impact: The ruling should help trading in, purchase and resolution of non-performing assets.

2) Stressed-debt pricing should factor enforcement uplift: SARFAESI eligibility can directly improve recovery assumptions and acquisition economics.

3) Due diligence must test transferability: Deal teams should review assignment rights, security continuity, etc..

For further details, please see:

Kotak Mahindra Bank v. Trupti Sanjay Mehta & Ors.pdf

For any queries/clarifications, please feel free to contact us:

•  Jayesh H (jayesh.h@juriscorp.in)

•  Bhumika Makhija (bhumika.makhija@juriscorp.in)