The High Court of Madhya Pradesh (“HC”), in the case of Virendra Rathore v. Tehsildar Distt. Mandsaur, has recently examined the issue whether housing finance companies (“HFCs”) will be bound by the pecuniary thresholds applicable to non-banking financial companies (“NBFCs”) for enforcement of security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).

Brief Facts

Virendra Rathore (“Petitioner”) had taken a secured loan of Rs. 8,00,000 (Indian Rupees eight lac) (“Loan”) from SRG Housing Finance Limited, an HFC (“Respondent”), by mortgaging his property as collateral (“Mortgaged property”). On the Petitioner’s failure to repay the Loan and the Loan being classified as a non-performing asset, the Respondent initiated proceedings under Section 13 of the SARFAESI Act. Thereafter, the Chief Judicial Magistrate passed an order directing, inter-alia, taking over of possession of the Mortgaged Property. The Petitioner filed a writ petition challenging the aforesaid order of the Chief Judicial Magistrate.

Issues before the HC:

- Whether the writ is maintainable in light of an alternative remedy of approaching Debt Recovery Tribunal (“DRT”) under Section 17 of the SARFAESI Act being available to the Petitioner?

- Whether the Respondent HFC is justified in taking action under Section 13 of the SARFAESI Act in light of the pecuniary threshold of Rs. 20,00,000 (Rupees twenty lac) applicable to NBFCs?

Submissions by the Petitioner

- The Respondent was not entitled to initiate proceedings under the SARFAESI Act since the debt owed was less than the pecuniary threshold of Rs. 20,00,000 (Rupees twenty lac) applicable to NBFCs for enforcement under SARFAESI Act vide notification dated February 24, 2020 read with the notification dated February 12, 2021 issued by the Central Government under the SARFAESI Act (collectively “NBFC Notification”), which is applicable to the Respondent as well, since HFCs are a sub-category of the larger group of NBFCs.

Submissions by the Respondent 

- The writ petition is not maintainable since the Petitioner is required to undertake the alternate remedy available before the DRT under Section 17 of the SARFAESI Act.

- The Respondent being an HFC registered under Section 29A of the National Housing Bank Act, 1987 (“NHB Act”), falls under the definition of ‘financial institution’ (and ‘secured creditor’ as well) under Section 2(1)(m)(iv) of the SARFAESI Act vide notification dated June 17, 2021 issued by the Central Government under the SARFAESI Act (“HFC Notification”), and is thus entitled to enforce security in accordance with the SARFAESI Act.

- The HFCs are governed by different set of notifications under the NHB Act and the NBFC Notification prescribing the pecuniary thresholds for enforcement of security by NBFCs is not applicable to the Respondent being an HFC.

Decision of the HC

The High Court of Madhya Pradesh vide order dated May 22, 2024 (“HC Order”) upheld the maintainability of the writ petition. The court relied on the case of Godrej Sara Lee Ltd. v. Excise and Taxation Officer (2023 SCC Online SC 95) and held that the issue raised in the present case was a pure question of law touching upon the jurisdiction, existence and exercise of power by the Respondent, and an alternative remedy in the form of an action under Section 17 of the SARFAESI Act, could not stand in the way of the court to exercise its writ jurisdiction. The Petitioner, if aggrieved by any measures taken by the Respondent under Section 13 or 14 of the SARFAESI Act, is entitled to resort to remedy under Section 17 of the SARFAESI Act on the grounds (except as decided in the present case).

However, the court dismissed the writ petition on merits. The court held that Section 29A of the NHB Act, is a complete code in itself which governs the registration of HFCs. From a perusal of the said provision, it is clear that the requirements for registration of an HFC with Reserve Bank of India are different from those for an NBFC, and thus an HFC may or may not be an NBFC. 

Further, the court noted that specific notifications have been issued in respect of the NHB Act (including HFC Notification and the notification dated December 18, 2015 issued by the Central Government, which specifically recognised the Respondent as an HFC) under the SARFAESI Act instead of the general notifications issued under the Reserve Bank of India Act, 1934 (“RBI Act”) in respect of NBFCs. Such separate issuance of notifications is indicative of the fact that HFCs are distinctly regulated, separate from NBFCs and are thus, required to be treated as an entirely different special class different from NBFCs. Further reliance was placed on the long-settled principle of ‘generalia specialibus non derogant’ which means ‘general provisions never derogate from the special ones and that general provisions must always give way to the special provisions’.

Therefore, the court held that HFCs are governed by the specific notifications made under the NHB Act and not the generic notifications governing NBFCs, made under the RBI Act. Accordingly, the NBFC Notification issued in respect of NBFCs shall not be applicable to the Respondent and the Respondent was entitled to recover the loan by resorting to provisions of the SARFAESI Act, irrespective of the pecuniary threshold of Rs. 20,00,000 (Rupees twenty lac) applicable to NBFCs.

Please find a copy of the HC Order, here. 

This update has been contributed by Aastha (Partner) and Arth Singhal (Associate).

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