SARFAESI Act | 'Bank' As Assignee Can Invoke Recovery Measures Even If Debt Was Originally Created By Non-Notified Financial Institution: Supreme Court

"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." Supreme Court, in a judgment dated September 02, 2026, held that a 'bank' as defined under Section 2(1)(c) of the SARFAESI Act is legally entitled to invoke recovery measures under the Act even in respect of a debt acquired from a financial entity that was not a notified 'financial institution' at the time of the debt's inception.

A bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva observed that the legislative intent behind the SARFAESI Act was to provide an expeditious mechanism for the recovery of 'live and owing' debts, and the status of the debt is effectively transformed upon its acquisition by an entity covered under the Act.

SARFAESI Act Applied to Live and Owing Debts

The court underscored that the Act was enacted to facilitate the liquidation of non-performing assets to sustain economic growth, and the mere fact that a debt was not a 'secured debt' at the time of its creation does not create a permanent immunity for the borrower. The bench noted that the objective of the enactment would be defeated if borrowers could evade the rigours of the Act simply because the original lender was not a notified financial institution, as this would result in an unequal playing field compared to borrowers whose lenders were notified from the outset.

Status of Loan Account upon Assignment

The court reasoned that once a loan account is taken over by a bank, the character of the debt undergoes a change for the purposes of the SARFAESI Act. The ruling clarifies that it is immaterial whether the original lender was a notified institution or whether the status was acquired through subsequent assignment to a bank. The crucial factor is that the assignee bank qualifies as a 'secured creditor' under Section 2(1)(zd) of the SARFAESI Act, thereby empowering it to initiate enforcement measures against the borrower.

Rejection of Restrictive Interpretation

The bench expressly rejected a restrictive interpretation of the statute that would disentitle an assignee bank from invoking the SARFAESI Act, characterizing such an argument as lacking legal foundation. The court held that the purposive interpretation of the definition clauses, as established in precedents like M.D. Frozen Foods Exports Private Limited vs. Hero Fincorp Limited and Indiabulls Housing Finance Limited vs. Deccan Chronicle Holdings Limited, forecloses any attempt by borrowers to dissect definitions to escape enforcement.

Court Reaffirms Legislative Intent

The court reiterated that the SARFAESI Act acts as an expeditious procedural methodology for recovery and does not create new substantive rights that could be argued as being retrospectively applied. The bench emphasized that the borrower's fundamental obligation to repay the debt remains unchanged, regardless of the mode of recovery chosen by the secured creditor. The ruling effectively harmonizes the operational scope of the Act with the requirements of a healthy secondary market for non-performing assets.

In the appeal involving the Mehtas, the Supreme Court set aside the Bombay High Court's judgment that had restricted the bank's ability to invoke the Act, noting that the tribunal had failed to consider the matter on its merits. The securitisation application was restored to the Debt Recovery Tribunal, Nagpur, with a conditional deposit requirement to ensure the balance of equities. The appeal filed by Kotak Mahindra Bank Limited was allowed, while the other appeals by the Sables and Poorti Rent a Car were dismissed, the latter on the grounds that the secured property had already been sold.

Date of Decision: 02 September 2026