What happened
Three appeals were decided together on one question. In the lead matter, a borrower took a home loan of ₹69,60,000 from City Financial Consumer Finance Limited, a non-banking financial company that at that time had **not** been notified as a “financial institution” under Section 2(1)(m) of the SARFAESI Act. He used it to buy a flat from Trupti Sanjay Mehta and her husband. He defaulted, and an arbitration award of 31 July 2010 held him liable for ₹75,30,872 with interest. On 13 July 2012 Kotak Mahindra Bank took over the loan account. It then issued a demand notice under Section 13(2) of the SARFAESI Act on 3 July 2013, by which point the claim stood at ₹1,10,39,111. Using Sections 13(4) and 14, it obtained an order from the Chief Metropolitan Magistrate, Mumbai on 11 July 2014 to take physical possession of the flat. The bank says it found the Mehtas still in possession, although they had sold the flat to the borrower. The Mehtas filed a securitisation application before the Debts Recovery Tribunal in Mumbai. Their argument was a threshold one: Kotak was only the assignee of a debt that was not covered by the SARFAESI Act when it was created, so it could not use the Act at all. The DRT accepted that on 28 November 2014, and the Bombay High Court agreed on 16 July 2015. The bank appealed. Two companion appeals raised the same point on different facts. The Reserve Bank of India was a respondent and told the Court it had no objection to banks purchasing non-performing assets from financial institutions and NBFCs, and that a restrictive reading would leave an assignee bank unable to enforce the security at all.
What the court held
The question, as the Court framed it in its first paragraph, was whether a “bank” under Section 2(1)(c) can use the SARFAESI Act to recover a debt assigned to or taken over by it from a financial entity that was **not** governed by the Act when the debt was created. The Court held that it can. Its route was through two earlier decisions. In *M.D. Frozen Foods*, it had been held that the Act's definitions convey a legislative intent that it applies to all existing loan agreements, irrespective of whether the lender was a notified financial institution on the date of the agreement, and that the Act becomes applicable to all loans “owing and live” when it becomes applicable. In *Indiabulls*, the Court went further and rejected a borrower's argument that its loan could not be a security arrangement because the original lender was not a financial institution. The present facts were a slightly different shape — the earlier cases turned on the identity of the *entity*, this one on the status of the *loan*. The Court held the distinction made no difference (para 36): when the institution is one to which the Act already applies, its acquisition of a non-performing secured loan account from an entity outside the Act “would immediately clothe the said loan account with the attributes of a ‘secured debt’”. Two further observations carry weight. The Court said (para 32) that the borrowers' argument, if accepted, would mean people who borrow from NBFCs outside the Act enjoy greater freedom to default than those who borrow from NBFCs inside it — and that every borrower is bound to honour the commitment to repay regardless of the mode of recovery. And it said (para 37) it is not open to borrowers to “dissect and nit-pick” the Section 2(1) definitions, because the purposive interpretation in the earlier judgments forecloses the argument. **What actually happened to each set of borrowers matters as much as the rule.** The Bombay High Court judgment was set aside — but because the DRT had decided against the bank at the threshold, the other factual and legal issues the Mehtas raised had never been heard at all. The Court restored their securitisation application to the DRT at Nagpur for decision on merits, on their depositing a further ₹25 lakh within eight weeks, without prejudice. In the second matter the Court held the bank was legally entitled to invoke Section 14, and since that securitisation application had already been dismissed for delay, those borrowers were left to whatever remedies arise on a fresh cause of action. In the third the property had already been sold in 2023. One appeal was allowed, two dismissed, parties to bear their own costs. One detail the Court noted in passing: the NBFC that made these loans was itself notified as a financial institution in August 2018. Had the loans simply stayed with it, the earlier case law would have covered them anyway.
The law behind it
The SARFAESI Act, 2002 lets a secured creditor enforce security without going to court first. The definitions the Court worked through are in Section 2(1): (c) “bank”, (m) “financial institution” — which at sub-clause (iv) covers any NBFC that the Central Government notifies for the purposes of the Act — (k) “financial assistance”, (ha) “debt” (as amended with effect from 1 September 2016), (o) “non-performing asset” and (zf) “security interest”. Whether a lender falls inside Section 2(1)(m) is what decides if it can use the Act, and that is the hook the borrowers tried to hang their case on.
The enforcement machinery in this case ran as follows: a demand notice under Section 13(2), measures under Section 13(4), and an application under Section 14 to the Chief Metropolitan Magistrate for help in taking physical possession. A borrower or an aggrieved person challenges those measures by a securitisation application to the Debts Recovery Tribunal — the remedy the Mehtas used, and the one the Supreme Court restored to the Tribunal here.
On the banking side, the Court recorded the RBI's circular of 13 July 2005 on the purchase and sale of non-performing assets, and ICICI Bank Limited v. Official Liquidator of APS Star Industries Limited (2010) 10 SCC 1, where it was held that assignment of debts is a permissible activity under the Banking Regulation Act, 1949 and that those RBI guidelines have the statutory force of law.
You can look up the statutory provisions in our legal codes reference, and the background concepts in the knowledge base.
What this means for you
If you borrowed from a finance company and your loan has since been sold to, or taken over by, a bank, this decision closes off one line of defence completely. You can no longer argue that the bank cannot use SARFAESI because your original lender was outside the Act when the loan was made. The Court has said that argument is foreclosed. What this does **not** do is hand the bank a free run. The Act still has to be followed — the demand notice under Section 13(2), the measures under Section 13(4), the Magistrate's order under Section 14. Whether the bank did all of that properly, whether the amount claimed is right, whether the security was validly created, whether a sale was fairly conducted: none of that was decided here, and all of it remains arguable. The most useful thing in this judgment for a borrower is what happened to the Mehtas. They lost the threshold point, and the Court still sent their case back to the Tribunal because their real objections had never been heard. Losing the jurisdictional argument is not the same as losing the case. The warning sits alongside it. The second set of borrowers had their securitisation application dismissed for **delay**, and once the Supreme Court held the bank was entitled to act, there was nothing left for them. In SARFAESI matters the clock is unforgiving, and a good argument filed late is worth nothing.
What to do
1. **Find out who actually holds your loan now.** Assignment is common and is usually notified in writing. The identity of the current holder is what decides which recovery route is open. 2. **Diary the Section 13(2) notice date.** It starts a 60-day period, and what you do inside it matters more than anything you do after. 3. **If measures have been taken, the remedy is a securitisation application to the Debts Recovery Tribunal** — and it is time-barred if you are slow. That is precisely how one set of borrowers in this case lost. 4. **Do not build your defence on your original lender's status.** After this judgment it will not work. Put your effort into the amount claimed, the validity of the security, and whether the procedure was actually followed. 5. **Keep every document**: the loan agreement, the assignment intimation, the demand notice, the possession notice, any valuation and sale notice. Dates on these are usually where a real defence is found. 6. **If you cannot afford a lawyer**, the District Legal Services Authority in your district provides free legal aid under the NALSA framework.
Source
Supreme Court of India, Justices Sanjay Kumar and Sanjeev Sachdeva, 2 September 2026. Citation: 2026 INSC 943. Read the full judgment .
This explainer was written from the primary judgment text, not from news reports.