SARFAESI Act Current Affairs - 2020

SC places Cooperative banks under SARFAESI Act

The Supreme Court of India recently pronounced its judgement that cooperative banks shall be placed under SARFAESI Act.

Highlights

The Supreme court has upheld the GoI notification dated January 28, 2003 under which the cooperative societies have come under SARFAESI Act. The Apex court has also ruled that the Cooperative Banks have also come under the definition of banks under Banking Regulation Act, 1949.

The Court has also ruled that under Sarfaesi Act, the Parliament has powers to provide procedures for recovery of loans under the act.

Sarfaesi Act

Sarfaesi Act is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The banks utilize the act as tool to reciver bad loans, especially the non-performing assets.

The act provides procedures to transfer Non-Performing Assets for reconstruction of assets. It also enforces security interests of the banks without intervention of the court. In order to recover a debt, the act empowers the financial institutions in India to take over immovable property.

PMLA prevails over Bankruptcy Act and Insolvency Code: Delhi HC

The Delhi High Court has ruled that Prevention of Money Laundering Act (PMLA) prevails over the Bankruptcy Act and insolvency code when it comes to attachment of properties obtained as ‘proceeds of crime’.

The Enforcement Directorate (ED) had challenged the orders of PMLA appellate tribunal on the pleas of various banks. PMLA Tribunal had held that third parties, banks in this case, which have legitimately created rights such as a charge, lien or other encumbrances, have a superior claim over such properties.

Observations made by Delhi High Court

  • PMLA, Recovery of Debt and Bankruptcy Act (RDBA), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act and Insolvency and Bankruptcy Code (IBC) must co-exist and be enforced in harmony.
  • The Delhi High Court has set aside the verdict of the PMLA tribunal and held that the objective of PMLA being distinct from the purpose of RDBA, SARFAESI Act and IBC.
  • RDBA, SARFAESI Act and IBC doesn’t not prevail over PMLA
  • The attachment order under the PMLA will not be illegal only because a secured creditor has a prior secured interest [charge] in the property, within the meaning of the expressions used in RDBA and SARFAESI Act.
  • Also mere issuance of an order of attachment under the PMLA does not ipso facto render illegal a prior charge or encumbrance of a secured creditor, the claim of the latter for release [or restoration] from PMLA attachment being dependent on its bonafides.

Delhi High Court has stated that by the virtue of Section 71, PMLA has the overriding effect over other existing laws in the matter of dealing with “money-laundering” and “proceeds of crime”.