1.

Judicial Interpretations of the Act:

a. Central Bank of India v. State of Kerala, (2009) 3 SCALE 451
A three judge bench of the Supreme Court recently
examined the priority of claims of a secured creditor,
exercising its rights under the SARFAESI vis-a-vis dues of the
State under various State Revenue legislation. Several of
these State legislations contain provisions stipulating that
amounts due to the State will constitute a first charge on
property of an individual. Certain secured creditors, in
exercise of their rights under S.13 of the SARFAESI took
possession of and sold assets of defaulting borrowers. They
subsequently

received

notices

from

State

Revenue

Departments, stating that there were dues from the borrower

to the State on account of arrears of sales tax, that therefore
the Secured Creditor could not have taken possession of or
sold the security since the State had first charge on the
assets, towards its claims of sales tax and that the proceeds
from the asset sales would have to be made over to the State.
It was asserted that in view of the provision in the State law
creating a first charge, State dues would have priority over
dues of individual creditors. The Secured Creditors argued
that

the

SARFAESI

and

the

DRT

Acts

were

central

legislations which had been given over-riding effect, that

Parliament had designedly given priority to banks/FIs etc to
recover their dues under these Acts, and that therefore their
claims would have priority over any claims for State dues,
irrespective of the priority accorded under State laws.
The Supreme Court held that the SARFAESI Act and DRT Act
merely provide mechanisms for recovery or enforcement of a
security interest and do not create any first charge in favour
of secured creditors. It was held that therefore, where a State
legislation contains an express provision creating a first

charge on an entitys assets in relation to dues to the State,

in such cases, the States claim would have priority over the
claim of any secured creditor the non obstante provisions
contained in the SARFAESI and DRT Acts would not be
attracted in these cases. The first charge, created by law, was
held to have priority over existing mortgages.
b. In Transcore v. Union of India, AIR 2007 SC 712 the question
raised before the Supreme Court was whether withdrawal of
an application for recovery filed before the DRT was a
precondition for a secured creditor to invoke the provisions of
the SARFAESI. Several arguments were urged by borrowers
to contend that unless permission was sought from the DRT
in relation to a pending recovery application, secured
creditors could not invoke the SARFAESI. The Supreme Court
ruled that the remedy under the DRT Act and the remedies
under

the

SARFAESI

were

not

inconsistent

but

were

additional to each other and therefore there was no need for

a secured creditor to elect to chose one remedy over another
the doctrine of election would not apply. It was further held
that it would not be a pre-condition for a bank/FI to seek
leave to withdraw its recovery application and that the
provision introduced in the DRT in this regard was merely
enabling. The Supreme Court further clarified that in
pursuance of the provisions of the SARFAESI Act and Rules,
secured creditors would be entitled to take actual physical
possession of the secured asset and not mere symbolic
possession as was contended by borrowers who argued that if
they were ousted physically from the property, appellate
remedies under the Act would be rendered useless. The Court
pointed out that the Act and rules provided for restoration of
the status quo ante in the event of the borrower succeeding
in his appeal.

c. In Mardia Chemicals Ltd.

v. Union of India, AIR 2004 SC

2371 the constitutional validity of the SARFAESI was

challenged on several grounds. It was alleged that banks/FIs
were vested with arbitrary powers, that the borrower had
absolutely no remedy to protest any arbitrary action or
dispute the correctness of the demand, that the provisions for
appeal which stipulate that there should be a 75% predeposit were onerous, rendering the appeal itself illusory. The
constitutional challenge was dismissed and the court had
held that a legislation providing effective measures for
recovery of dues was much needed. It was noted that
borrowers had an opportunity to make their representations
in response to the notice issued by banks/FIs. The validity of
provisions allowing banks to enforce security interests
without approaching the court was upheld. However, the
Court read in the requirement of providing reasons for overruling any objections raised by borrowers, in response to
notices issued under S.13(4). It was also held that S.17 of the
Act requiring a 75% pre-deposit was unconstitutional and this
requirement was struck down.

2. Issues to consider:
a. One major issue being discussed in various articles is the
issue of priority of claims especially against State dues, in
light of the recent Supreme Court judgment in the Central
Bank of India case. It has been urged that in the absence of a
provision giving first priority to secured debts, very little may
be realised by creditors from a secured asset.
b. Foreign investors may not be entitled to invoke the SARFAESI
provisions unless they are notified by the Government and
fall within one of the categories of secured creditor
c. S.13(9) of the SARFAESI deals with situations of financing of
a financial asset by more than one secured creditors or joint
financing of a financial asset by secured creditors. It is
stipulated that in these cases, the consent of creditors
representing not less than 75% of the debt must consent to
initiating a particular action under the SARFAESI. It appears
that there is some support (in some DRT rulings) for the view
that this provision applies only to cases of consortium lending
and not to cases where security rights are created in relation
to one asset, in favour of many different creditors. In that
event, one creditor chooses to enforce a measure under
SARFAESI without the consent of others. Given that a
securitisation notice is not published in the papers, other
secured creditors may be unaware of the action initiated by
one creditor and may therefore lose the opportunity to
control treatment of the secured asset.