Blog on Court Custody of Secured Asset can’t be used as Shield by Debtor to prevent creditor from taking possession under SARFAESI Act
Introduction: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) is a crucial legislation in India that empowers creditors to enforce their rights against defaulting borrowers. It provides a mechanism for the realization of secured assets to recover outstanding debts. However, there have been instances where debtors have attempted to use court custody of secured assets as a shield to prevent creditors from taking possession. This blog explores the limitations of such tactics, backed by relevant judicial decisions.
- Scope of SARFAESI Act: The SARFAESI Act enables banks and financial institutions to recover their dues by enforcing the security interest without the intervention of courts. It grants certain powers to creditors, including the right to take possession and sell the secured assets. The objective is to provide an expeditious and efficient mechanism for debt recovery.
- Debtor’s Attempt to Use Court Custody: In certain cases, debtors resort to seeking court custody of secured assets to hinder or delay the creditor’s recovery process. They argue that since the asset is under the court’s control, the creditor cannot take possession, thereby frustrating the objectives of the SARFAESI Act.
- Judicial Decisions on Court Custody as a Shield:
- Satyawati Tondon v. Rajesh Tondon & Ors. (2010): The Supreme Court held that the mere fact that the asset is in court custody does not affect the rights of the secured creditor under the SARFAESI Act. The debtor cannot take advantage of court custody to prevent the creditor from taking possession.
- United Bank of India v. Satyawati Tondon (2010): The court observed that if a debtor is allowed to take advantage of court custody as a shield, it would defeat the very purpose of the SARFAESI Act. The creditor’s rights cannot be defeated by the debtor obtaining an order for the deposit of the asset with the court.
- Transcore v. Union of India & Ors. (2012): The Delhi High Court held that court custody cannot be used as a shield by the debtor against the secured creditor. The court clarified that the SARFAESI Act empowers the creditor to take possession, irrespective of the asset being in court custody.
- Capro Financial Solutions Ltd. V. Jem and Associates & Ors. (2023): The Bombay High Court in a recent judgment held that the Court cannot continue with the possession of mortgage property.
- Limitations and Exceptions: While court custody alone cannot shield the debtor, certain circumstances may limit the immediate possession by the creditor:
- Genuine dispute: If there is a genuine dispute regarding the debt or the security, the debtor may approach the court. In such cases, the court may decide to retain custody until the dispute is resolved.
- Valid legal grounds: If the debtor can establish valid legal grounds, such as the secured asset being under attachment in another proceeding, the court may temporarily prevent the creditor from taking possession.
- Conclusion: The SARFAESI Act was enacted to facilitate efficient debt recovery and empower creditors to enforce their rights. Debtors attempting to use court custody as a shield against the creditor’s possession face limitations. Judicial decisions have consistently upheld the creditor’s rights, emphasizing that the mere fact of court custody does not prevent the creditor from exercising their rights under the Act. However, legitimate disputes and valid legal grounds can temporarily delay the creditor’s possession. The overall objective of the SARFAESI Act remains the speedy recovery of debts, ensuring a fair balance between the rights of creditors and debtors.
- Limitations and Exceptions: While court custody alone cannot shield the debtor, certain circumstances may limit the immediate possession by the creditor:
