Bombay High Court: SARFAESI Act Bars DRI from Hindering Secured Creditors’ Dues Recovery amid Customs Act Probe against Debtor

Bombay High Court: SARFAESI Act Bars DRI from Hindering Secured Creditors’ Dues Recovery amid Customs Act Probe against Debtor

The Bombay High Court has observed that a secured creditor retains the right to recover its dues from the debtor’s assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), regardless of the debtor being under investigation for potential violations of the Customs Act.

A division bench comprising Justices GS Kulkarni and Firdosh P Pooniwalla quashed a directive from the Directorate of Revenue Intelligence (DRI) to the Bank of Maharashtra, instructing it not to take any action on the debtor’s property without prior consultation with the DRI.

The court observed that “it would be clear that the recovery as initiated by the petitioner under the SARFAESI Act cannot be impeded by the respondents (DRI) by taking recourse to Section 142A of the Customs Act. The reason being that Section 142A itself is a provision which saves the provisions of the SARFAESI Act under which the action was resorted by the petitioner to recover its dues from respondent No. 2. In any event, it is well settled that unless there is a preference given to a Crown debt by a statute, the due of a secured creditor like the petitioner would have preference over Crown debts”.

The petitioner, Bank of Maharashtra, had provided secured credit facilities to Arowana Sports Pvt. Ltd., who later defaulted on payments. Upon the declaration of its account as a non-performing asset (NPA) in August 2015, the petitioner bank initiated proceedings under Section 14 of the SARFAESI Act to recover the outstanding dues.

Nevertheless, the DRI issued a letter instructing the petitioner not to proceed with any action on the property of the debtor without prior consultation with the DRI until the ongoing investigations concerning smuggling and money laundering are concluded. Consequently, the bank filed the present writ petition before the High Court.

The bank argued that the directive from the DRI violated its rights as a secured creditor under the SARFAESI Act.

The DRI did not dispute the contents of the letter but justified it based on ongoing investigations involving the debtor and other entities mentioned in the letter.

The court noted that although Section 142A of the Customs Act stipulates that any amount payable under this Act shall constitute the first charge on the property of an assessee, this provision includes a saving clause that exempts the SARFAESI Act. Hence, the court observed that Section 142A of the Customs Act, which could potentially be the sole basis for the DRI to issue the challenged communication, is subservient to the SARFAESI Act.

Furthermore, the court added that Section 35 of the SARFAESI Act grants it overriding effect over other legislation. The court emphasized that the petitioner’s actions were initiated under the SARFAESI Act, which is a specific law for debt recovery, and consequently, should not be hindered by the provisions of Section 142A of the Customs Act.

The court reaffirmed that according to the SARFAESI Act, the dues of a secured creditor take precedence over the claims of the DRI. Consequently, the court nullified the challenged letter issued by the DRI, thereby permitting the bank to proceed with its actions against the debtor and the secured assets under the SARFAESI Act. However, the court preserved all contentions of the DRI regarding any recovery it may pursue against the entities mentioned in the contested letter.