A Debt Cannot Escape SARFAESI Merely Because It Originated with an Unnotified NBFC: Supreme Court Upholds Bank’s Right to Enforce Assigned Security

Case Name: Kotak Mahindra Bank Limited v. Trupti Sanjay Mehta and Others

Date of Judgment: 2 September 2026

Citation: 2026 INSC 943

Bench: Justice Sanjay Kumar and Justice Sanjeev Sachdeva

Held: The Supreme Court held that a bank governed by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 can invoke the Act to recover a secured debt assigned to or acquired by it from a non-banking financial company that was not notified as a “financial institution” under the SARFAESI Act when the loan was originally granted. Once such a live and legally recoverable secured loan is acquired by a bank to which the SARFAESI Act already applies, the loan immediately acquires the attributes of a “secured debt” enforceable under the Act.

The applicability of the SARFAESI Act does not depend upon whether the original lender was covered by the Act on the date of execution of the loan agreement or creation of the mortgage. It is sufficient that the debt remains “live and owing” and is subsequently held by a bank or financial institution entitled to invoke the Act. The borrower cannot avoid SARFAESI proceedings by dissecting the statutory definitions of “borrower,” “financial assistance,” “secured creditor,” “security arrangement” and “secured debt” to argue that the loan was outside the Act at its inception. Such a restrictive interpretation would defeat the legislative objective of facilitating the expeditious recovery of secured debts and resolution of non-performing assets.

Summary: The principal appeal arose from a home loan granted by City Financial Consumer Finance Limited, a non-banking financial company, to Amit Bipin Shah for purchasing a residential flat from Trupti Sanjay Mehta and Sanjay Walchand Mehta. CFCFL sanctioned a loan of ₹69.60 lakh and allegedly transferred ₹66.72 lakh to the sellers. After the borrower defaulted, an arbitral award dated 31 July 2010 directed him to pay ₹75.30 lakh with interest to CFCFL.

Kotak Mahindra Bank Limited acquired the loan account from CFCFL on 13 July 2012. It thereafter issued a demand notice under Section 13(2) of the SARFAESI Act and initiated measures under Sections 13(4) and 14 to take possession of the mortgaged flat. When possession was taken, the Mehtas were found occupying the property despite the alleged sale in favour of the borrower.

The Mehtas challenged Kotak Mahindra Bank’s action before the Debts Recovery Tribunal, contending that the Bank could not invoke the SARFAESI Act because the original lender, CFCFL, was not a notified financial institution when the debt was created. The DRT accepted the objection, declared the SARFAESI proceedings impermissible and directed restoration of the flat’s possession to the Mehtas. The Debts Recovery Appellate Tribunal dismissed the Bank’s appeal, and the Bombay High Court affirmed those decisions on 16 July 2015.

During the pendency of the matter before the Supreme Court, the Mehtas deposited ₹40 lakh with Kotak Mahindra Bank under an interim arrangement, following which possession of the flat was restored to them. The arrangement was expressly made subject to the final adjudication of the appeal.

Two connected appeals raised substantially the same question. In one, housing loans initially granted by CFCFL to the Sable family were assigned to Kotak Mahindra Bank, which thereafter initiated proceedings under Sections 13 and 14 of the SARFAESI Act. In the other, Poorti Rent a Car and Logistics Private Limited and its directors challenged SARFAESI measures initiated by the Bank in respect of a ₹2.98 crore loan originally advanced by CFCFL. The secured property in the latter matter was eventually sold in 2023.

The central question before the Supreme Court was whether a secured loan created in favour of an NBFC that was not governed by the SARFAESI Act at the relevant time could become enforceable under that enactment when subsequently assigned to a bank covered by the Act.

The Supreme Court examined the statutory definitions under Section 2 of the SARFAESI Act and the object underlying the legislation. It noted that the Act was enacted to facilitate the speedy recovery of defaulted secured loans, improve liquidity and reduce the burden of non-performing assets. Although the Act authorises stringent recovery measures with limited judicial intervention, its statutory objective cannot be disregarded while interpreting its provisions.

The Court relied substantially upon M.D. Frozen Foods Exports Private Limited v. Hero Fincorp Limited and Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited. In M.D. Frozen Foods, it had been held that an NBFC could invoke the SARFAESI Act in relation to existing loans once it was subsequently notified as a financial institution, provided that the debts remained live and recoverable. In Indiabulls, the Court recognised that a successor-in-interest could employ SARFAESI remedies even though the entity that had originally advanced the loan was not covered by the Act at that time.

Applying the same principle, the Court held that there was no material distinction between a case where the original lender subsequently comes within the SARFAESI framework and a case where the debt itself is transferred to a bank already governed by the Act. In both situations, the live and secured loan becomes recoverable through the mechanisms provided under the SARFAESI Act.

The Court rejected the borrowers’ argument that allowing banks to enforce such acquired debts would improperly enlarge the scope of the Act. It observed that borrowers who obtain loans from unnotified NBFCs cannot claim greater freedom to default merely because the original lender would have been required to adopt slower civil recovery proceedings. Every borrower remains under a legal and moral obligation to repay the loan with interest, irrespective of the recovery mechanism ultimately available to the creditor.

The Reserve Bank of India also supported the permissibility of banks purchasing non-performing assets from NBFCs and enforcing the underlying security. The Court noted that RBI guidelines recognise the purchase and sale of non-performing assets as a legitimate banking activity intended to develop a healthy secondary market, clean institutional balance sheets and improve capital adequacy.

Accordingly, the Supreme Court concluded that when a bank governed by the SARFAESI Act acquires a live, non-performing secured loan from an entity that was not covered by the Act, the bank can invoke the SARFAESI machinery for its recovery. The status of the original lender at the time the loan was advanced does not confer permanent immunity upon the debt from enforcement under the Act.

Decision: The Supreme Court allowed Kotak Mahindra Bank’s Civil Appeal No. 8531 of 2015 and set aside the Bombay High Court judgment dated 16 July 2015, along with the underlying decisions of the DRT and DRAT. Since the Mehtas’ other factual and legal objections had not previously been examined on merits, their securitisation application was restored to the DRT for fresh consideration. This opportunity was made conditional upon the Mehtas depositing a further ₹25 lakh with Kotak Mahindra Bank within eight weeks, without prejudice to their rights and contentions and subject to the final outcome of the proceedings.

In the Sables’ case, the Court held that Kotak Mahindra Bank was legally entitled to invoke Section 14 of the SARFAESI Act to obtain physical possession of the secured property. As their securitisation application had already been dismissed on the ground of delay, they were left to pursue appropriate legal remedies if a fresh cause of action arose.