Secured Creditor’s Statutory Right Under SARFAESI Act Cannot Be Interdicted By Provisional Attachment Under MPID Act: Bombay High Court

"Mere failure on the part of the Appellant to deposit the amount... cannot in the facts of the present case, operate to non-suit the Appellant or deprive it of the right to be heard. Such a consequence would be wholly disproportionate and contrary to settled principles governing adjudication of rights." Bombay High Court, in a significant ruling dated May 8, 2026, held that a secured creditor’s right to proceed under the SARFAESI Act cannot be stalled merely because the property is under provisional attachment under the MPID Act.

A division bench comprising Justice A.S. Gadkari and Justice Kamal Khata observed that since the bank's mortgage was created prior to the attachment, the bank occupies the position of a secured creditor whose rights cannot be lightly defeated. The court emphasized that a nationalized bank’s financial capacity ensures that any future liability toward depositors can be met without interdicting its current statutory remedies.

The State Bank of India (SBI) had sanctioned credit facilities to several respondents, secured by mortgage deeds executed between 2009 and 2012. Following repeated defaults, the accounts were classified as Non-Performing Assets (NPA) in 2015, and the bank initiated recovery under the SARFAESI Act. Simultaneously, the State Government provisionally attached these properties under the MPID Act in connection with the NSEL Scam. The Special MPID Court subsequently rejected SBI's application to sell the assets, citing the bank's failure to deposit certain amounts as directed in a previous 2017 order and holding that the state law (MPID) would prevail over the central law (SARFAESI).

The primary question before the court was whether a secured creditor can be prevented from exercising its rights under the SARFAESI Act due to a provisional attachment under the MPID Act. The court was also called upon to determine whether the failure of the bank to comply with a previous court-directed deposit could result in "non-suiting" the bank or depriving it of its right to be heard.

Secured Creditor's Rights Prioritize Over Subsequent Attachments

The court noted that the subject properties were mortgaged in favour of the appellant bank much prior in point of time to the state's attachment notifications. The bench held that these assets constitute secured assets in respect of the financial assistance extended to the borrowers. It observed that as a secured creditor, SBI’s rights under the law carry a priority that must be recognized during the adjudication of claims.

Section 26-E of SARFAESI Act and Priority of Dues

The bench addressed the applicability of Section 26-E of the SARFAESI Act, which grants priority to secured creditors over all other debts and government dues. The court disagreed with the Trial Court’s finding that the SARFAESI provisions were inapplicable simply because the attachment was related to "deposits and investments" rather than taxes. The High Court clarified that the bank, as a deemed custodian of public money, holds a right that stands on a higher pedestal.

"The Appellant who is a deemed custodian of public money has a higher right than that of the investors with the NSEL."

Failure to Deposit Amount Does Not Non-Suit the Bank

A major point of contention was SBI's failure to comply with a 2017 order directing a deposit of funds. However, the High Court held that such a failure cannot be used to "non-suit" the bank. The judges reasoned that depriving a nationalized institution of its right to be heard based on a technical default or non-compliance of a deposit order is a "wholly disproportionate" consequence that goes against the principles of justice.

No Prejudice to Depositors Due to Bank’s Financial Capacity

The court highlighted that SBI is a leading nationalized bank with unquestioned financial capacity. It observed that permitting the bank to proceed with the sale under the SARFAESI Act would not cause prejudice to the depositors of NSEL. If it is ultimately determined that the sale proceeds must be appropriated toward MPID claims, the bank can be directed to deposit the requisite amounts at that stage without delay.

"In the event it is ultimately held that the sale proceeds are required to be appropriated towards the claims of the depositors of NSEL... the Appellant, having unquestioned financial capacity, can be directed to account for and deposit the requisite amounts."

Interdiction of Statutory Remedy Unjustified

The High Court found no legal justification to interdict the appellant's statutory remedy under the SARFAESI Act at this stage. It set aside the Trial Court's order, noting that the Special Judge had erred in holding that the MPID Act would automatically prevail over the Union Statute in this context. The bench emphasized that the bank is entitled to recover its dues, which stood at over Rs. 183 crores as of April 2023.

Trial Court Lacked Authority to Stop SARFAESI Action

Referencing the bar on civil court jurisdiction under Section 34 of the SARFAESI Act, the court suggested that the Trial Court had overstepped by stopping a rightful recovery action. The bench allowed the appeals, granting SBI permission to proceed against the secured assets and setting aside the impugned order of the Special MPID Court dated March 8, 2023.

The High Court concluded that the appellant's status as a secured creditor with a prior mortgage must be upheld over subsequent provisional attachments. By allowing the bank to proceed with the auction, the court balanced the interests of the bank with the eventual claims of the NSEL depositors, relying on the bank's solvency to protect all parties.

Date of Decision: 08 May 2026