SARFAESI Act | Supreme Court Directs Full & Final Settlement Of Debt Assigned To ARC To Save Running Enterprise, Disposes Section 7 IBC Proceedings

"This Court is not only the Court of law but also a Court of equity and the relief has been granted after balancing the interests of both parties and to do complete justice between the parties." Supreme Court, in a significant ruling dated October 26, 2026, exercised its equitable jurisdiction to protect a running manufacturing company by directing a full and final settlement of debts assigned to an Asset Reconstruction Company, holding that "This Court is not only the Court of law but also a Court of equity and the relief has been granted after balancing the interests of both parties and to do complete justice between the parties."

A three-judge bench comprising Chief Justice of India Surya Kant, Justice Joymalya Bagchi, and Justice V. Mohana ruled that where an enterprise employs numerous workers and shows bona fide intent by depositing the substantial debt acquisition cost, courts can balance commercial equities to bring litigation to a quietus. The judgment quashed ongoing disputes, ordering the closure of proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 and the Recovery of Debts and Bankruptcy Act, 1993 upon receipt of the determined settlement.

The appellant, Atibir Industries Co. Ltd., engaged in manufacturing sponge iron and allied products, had availed credit facilities from a consortium led by the State Bank of India. Following defaults and subsequent to Reserve Bank of India COVID-19 regulatory moratorium circulars, the bank declared the account as a Non-Performing Asset with retrospective effect from October 16, 2020, and assigned the debt to Respondent No. 2, an Asset Reconstruction Company, for a consideration of Rs. 250 crores. The bank simultaneously pursued recovery before the Debts Recovery Tribunal, initiated corporate insolvency resolution proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, and issued statutory notices under the SARFAESI Act. A Single Judge of the Calcutta High Court set aside the NPA classification and debt assignment, but the Division Bench reversed that order, prompting the borrower to approach the Supreme Court.

The primary question before the court was whether the retrospective declaration of the loan account as an NPA and its subsequent assignment under Section 5 of the SARFAESI Act was sustainable in law amidst RBI moratorium guidelines. The court was also called upon to determine the scope of liability and reasonable return payable by the borrower to an assignee Asset Reconstruction Company to achieve complete discharge and salvage a running industrial enterprise.

Simultaneous Recourse Under SARFAESI, DRT, And IBC

The bench examined the multi-pronged recovery strategy adopted by the lender, which pursued simultaneous actions across distinct legal fora. The court noted that while parallel remedies are statutorily recognized, the abrupt assignment following stalled settlement talks warranted judicial scrutiny.

Referring to established jurisprudence governing institutional recovery mechanisms, the bench took note of the legal position settled in Transcore v. Union of India and Another, which held that the remedy under the SARFAESI Act is an additional remedy, meaning withdrawal of an original application pending before the DRT is not a condition precedent for initiating securitisation measures.

The bench also adverted to ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited, reiterating that an outstanding debt is an asset in the hands of the bank that can be transferred, and such assignment in no manner impairs the rights of the borrower. It was similarly observed, relying on Bijnor Urban Cooperative Bank Limited v. Meenal Aggarwal, that no writ of mandamus can be issued under Article 226 directing a financial institution to positively grant the benefit of a One-Time Settlement.

Abrupt Assignment Amidst Settlement Talks Noticed

The court expressed serious reservations regarding the conduct of the assignor bank, which classified the debt retrospectively and assigned it in haste despite ongoing settlement negotiations. The bench observed that the sudden issuance of an e-auction notice for stressed loan exposure came as an unexpected disruption to the debtor.

The judges noted that the borrower had already tendered substantial payments towards settlement and was actively engaging with the bank when the debt was assigned to Respondent No. 2 for Rs. 250 crores. The court pointed out that the bank took a sharp procedural turn after approaching the DRT and the NCLT, executing the assignment in swift succession without addressing underlying classification anomalies.

Justice Anil R. Dave Report On Assignee's Reasonable Return

During the pendency of the appeal, the apex court had intervened to save the running business, recording the payment of the base acquisition consideration of Rs. 250 crores by the borrower to the assignee and appointing former Supreme Court judge Justice Anil R. Dave to adjudicate claims for interest or additional liability.

The former judge's report noted that the pre-assignment dues of Rs. 453.83 crores were not strictly determinative for satisfying the assignee, as the assignee's actual capital investment stood at Rs. 250 crores. Justice Dave had calculated alternative returns on the invested capital ranging between 13% and 15% per annum, alongside recommending Rs. 50 lakhs toward litigation costs, while taking note of the ARC's failure to furnish its financial statements to establish its normal rate of return.

The court also took cognizance of the borrower's serious assertion that the funds used by the ARC to acquire the debt were routed through an entity controlled by a commercial competitor in the iron and steel industry, indicating an alleged attempt to orchestrate an indirect takeover of the running unit.

"In the peculiar circumstances of the case without going into any legal issues or whether the compensation amount will have to be calculated on the basis of the debt value or the acquisition value etc. and without expressing any opinion on the conduct of the parties, this Court directs that a sum of Rs.125 crores over and above a sum of Rs.250 crores will have to be paid."

Balancing Equities To Preserve Operational Industries

The bench emphasized the need to balance pure commercial rights with broader socio-economic considerations, particularly the survival of operational factories and employment security.

The judges observed that it was in the interest of the appellant company, which is a running concern supporting numerous employees whose livelihoods would be adversely impacted, that a pragmatic resolution be crafted under equitable jurisdiction.

Consequently, the court left open contentious legal questions regarding the validity of the retrospective NPA classification and compliance with Section 5 of the SARFAESI Act, choosing instead to invoke its powers to fashion an equitable and conclusive exit framework.

Final Directions And Quashing Of Pending Proceedings

To bring lasting finality to the protracted dispute, the Supreme Court directed the appellant to pay a further sum of Rs. 125 crores to the assignee Asset Reconstruction Company within a strict period of 12 weeks.

The bench ordered that this additional payment, fixed after factoring in the recommended 15% return and accrued expenses over the preceding 18 months, shall operate as full and final settlement of all claims concerning the assigned debt.

The court directed that upon receipt of the specified amount, the lenders shall within four weeks release all mortgages, guarantees, and return original title deeds. The bench further directed that upon such compliance, the proceedings pending before the NCLT Kolkata under Section 7 of the IBC and the recovery application before the DRT-1 Kolkata shall stand disposed of, warning that any breach of the 12-week timeline would entitle the creditors to revive all actions.

Disposing of the appeals, the Supreme Court concluded that courts of equity must balance creditor returns against the preservation of functional industrial units. The ruling establishes that where an enterprise discharges the assignee's capital acquisition cost and tenders reasonable commercial compensation, pending recovery and corporate insolvency actions can be conclusively brought to an end.

Date of Decision: October 26, 2026