Case at a Glance
Kotak Mahindra Bank took over home and business loans from City Financial Consumer Finance Ltd (CFCFL), an NBFC that was not a notified “financial institution” under the SARFAESI Act when the loans were given. Borrowers argued the bank could not use SARFAESI to recover such debts. The Supreme Court disagreed: once a covered bank acquires a live secured NPA, the loan account is clothed with the attributes of a “secured debt” and the Act can be invoked. It set aside the Bombay High Court’s contrary ruling in the lead matter, though it sent the borrowers’ remaining objections back to the DRT.
In the lead matter, CFCFL gave a home loan of ₹69,60,000 to a borrower to buy a flat from the Mehtas. The borrower defaulted, and an arbitral award dated 31 July 2010 directed payment of about ₹75.3 lakh. Kotak Mahindra Bank (KMBL) took over the loan from CFCFL on 13 July 2012, issued a Section 13(2) notice and obtained a Section 14 order for physical possession. The Mehtas challenged this before the DRT (S.A. No. 39 of 2014), which held that KMBL could not invoke the SARFAESI Act; the DRAT and then the Bombay High Court (on 16 July 2015) agreed. The Supreme Court stayed the High Court judgment and in 2017 let the Mehtas regain possession on depositing ₹40 lakh as an interim arrangement.
Two other matters were heard alongside. The Sables had taken two housing loans from CFCFL in 2009, which KMBL took over in April 2013; their DRT challenge was dismissed as time-barred and they challenged the later Section 14 order directly in the Supreme Court. Poorti Rent a Car and its directors had taken a ₹2.98 crore loan from CFCFL; it was assigned to KMBL in July 2012, and the property was taken over in May 2022 and sold in 2023. CFCFL itself was notified as a financial institution only on 27 August 2018.
The Key Question Before the Court
Can a bank covered by the SARFAESI Act use the Act to recover a debt it acquired from an NBFC that was not a notified financial institution when the loan was created?
The Status of the Debt Follows the Holder
The borrowers argued that the Act applies only to loans given by entities covered at the time of lending, and that banks buying NPAs from non-covered lenders should not get the Act’s summary recovery powers, relying on the rationale in Mardia Chemicals Ltd. v. Union of India, (2004) 04 SC CK 0076. KMBL, supported by the RBI, argued that the Act applies to debts that were live when the Act became applicable to the holder, and that a restrictive reading would prevent assignee banks from enforcing security. The Court relied on M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited, (2017) 09 SC CK 0076, which held that a later-notified NBFC can enforce security for loans already “alive”, and Indiabulls Housing Finance Ltd. v. Deccan Chronicle Holdings Ltd., (2018) 02 SC CK 0063, which allowed a successor by merger to invoke the Act. It also referred to ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 09 SC CK 0043 on the permissibility of assignment of debts.
While those cases focused on the identity of the lender and this one on the status of the debt, the Court found the core issue to be the same. A claim “live and owing” becomes subject to the Act once its holder is covered, and acquisition of a secured NPA by a covered bank “would immediately clothe the said loan account with the attributes of a ‘secured debt’”. Emphasising the Act’s purpose and the borrower’s obligation to repay “irrespective of whether a financial institution comes under the SARFAESI Act or not”, the Court refused to let borrowers nit-pick the definitions in Section 2(1). However, because the DRT had never decided the Mehtas’ other objections on merits, the Court restored their securitisation application rather than ending the dispute.
What the Court Actually Held
- A bank under Section 2(1)(c) can invoke the SARFAESI Act to recover a live secured debt it acquired from a non-notified NBFC.
- Acquisition of a secured NPA by a covered bank clothes the loan account with the attributes of a “secured debt”.
- Mehta matter: Civil Appeal No. 8531 of 2015 allowed, Bombay High Court judgment of 16 July 2015 set aside, S.A. No. 39 of 2014 restored to the DRT for its other issues, with a further ₹25 lakh deposit within eight weeks, without prejudice.
- Sable and Poorti matters: appeals dismissed; KMBL was entitled to invoke Section 14, and the Poorti property had already been sold in 2023.
Why This Judgment Matters
- It settles that assignment of NBFC loans to banks carries SARFAESI enforcement with it, a common scenario in NPA sales.
- Borrowers cannot escape the Act merely because the original lender was outside it when the loan was given.
- It strengthens the secondary market for stressed loans, which the RBI supported before the Court.
What Should Advocates Take Away From the Judgment?
For Borrowers
- If your loan was sold to a bank, expect SARFAESI notices to be valid even if the original NBFC could not have used the Act.
- Other objections, such as procedure, valuation or limitation, remain open before the DRT.
For Counsel
- Cite Kotak Mahindra Bank v. Trupti Sanjay Mehta, (2026) 09 SC CK 0100 with M.D. Frozen Foods and Indiabulls on the ‘live debt’ principle.
- Challenges based purely on the original lender’s non-notified status are now unlikely to succeed.
- Check limitation for securitisation applications carefully, as the Sable matter shows.
Key Takeaways
- Assigned NBFC loans can be enforced under SARFAESI by a covered bank.
- The debt must be live and owing when the holder becomes covered.
- Borrower’s duty to repay does not change with the identity of the creditor.
- Unadjudicated objections can still be pursued before the DRT.
Frequently Asked Questions
Can a bank use SARFAESI on a loan it bought from an NBFC?
Yes. The Court held that once a covered bank acquires a live secured NPA, the account takes on the attributes of a secured debt and the bank can invoke the Act.
Did the Mehtas lose outright?
No. Although the Court held KMBL could invoke the Act, it restored their securitisation application to the DRT for the issues that were never decided, subject to a further ₹25 lakh deposit.
What did the RBI say?
The RBI had no objection to banks buying NPAs from NBFCs and argued that a narrow reading would prevent assignee banks from enforcing security.
Conclusion
The Supreme Court has aligned SARFAESI enforcement with the commercial reality of loan assignments: what matters is that a covered bank holds a live secured debt, not who first lent the money.
Practical takeaway: Borrowers whose loans were sold to banks should focus on procedural and merits defences before the DRT; the ‘original lender was not covered’ argument is no longer available.
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