In Kotak Mahindra Bank Ltd. v. Trupti Sanjay Mehta & Ors., a Bench of Justices Sanjay Kumar and Sanjeev Sachdeva has settled a question that had begun to unsettle the market for acquired and securitised NBFC loan portfolios — whether a bank that takes an assignment of a secured debt originally made by a non-banking finance company can enforce that debt under the SARFAESI Act, 2002, if the NBFC itself was never a "financial institution" specifically notified under Section 2(1)(m) of the Act at the time it advanced the loan. The Court answered yes, setting aside a Bombay High Court ruling that had gone the other way.
The dispute traced back to a loan originated by CFCFL, an NBFC that was not itself a notified financial institution under SARFAESI when it advanced the facility. Kotak Mahindra Bank later acquired the underlying debt and, when the loan turned non-performing, sought to enforce its security interest under SARFAESI's summary machinery. The borrower resisted enforcement on the footing that since the debt had originated with a lender outside SARFAESI's coverage, the debt itself was permanently outside the Act's reach — a position the Bombay High Court accepted, blocking Kotak Mahindra's enforcement action.
The Supreme Court disagreed with that characterisation. The Bench held that what matters for SARFAESI enforcement is the status of the entity actually seeking to enforce the security interest at the time it invokes the Act — not the regulatory status of whichever earlier lender originated the loan. Once a bank, which is unquestionably covered by SARFAESI, lawfully takes an assignment of a live secured debt and becomes the secured creditor of record, the debt becomes enforceable under the Act in the assignee bank's hands. The Court's reasoning treats the debt and the underlying security interest as travelling with the assignment to a SARFAESI-covered entity, rather than being permanently tainted by the identity of the originating lender.