SARFAESI Possession Of Property Doesn't Bar Redevelopment If Security Is Protected: Bombay High Court

The Bombay High Court on 7 September held that a secured creditor's possession of mortgaged property under the SARFAESI Act does not, by itself, prevent redevelopment of the property, provided the creditor's security remains protected.

Justice Amit Borkar permitted redevelopment of flats in Virani Towers, over which the State Bank of India (SBI) had taken possession under SARFAESI proceedings, while directing that the Bank's security should not be diluted or extinguished. The Bench observed:

“…Section 35 of the SARFAESI Act cannot be understood to mean that a secured property can never be redeveloped. The provision protects the operation of the SARFAESI Act against inconsistent provisions contained in other laws. It does not mean that redevelopment must stop even when the Bank's security is properly protected. The Bank continues to have its independent remedies under the SARFAESI Act.”

Virani Tower Co-operative Housing Society had entered into a development agreement with Empire Realty. Of the 79 flats, the requisite consent for two flats had not been furnished as SBI was already in physical possession of those flats pursuant to measures taken under the SARFAESI Act.

Empire Realty approached the High Court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim protection and directions to facilitate the redevelopment.

SBI contended that it was neither a party nor a signatory to the development agreement and, therefore, could not be bound by its terms. It submitted that its rights over the flats arose independently under the SARFAESI Act.

The Court accepted SBI's contention to a limited extent. It held that since SBI was not a signatory to the agreement, it could not be compelled to arbitrate with the developer. However, this did not mean that the mortgaged property could never be redeveloped. It observed:

“If the old property is demolished and new property is constructed in its place, the security has to continue with the property which comes in place of the original property. The Bank cannot be made to lose its security only because the Society and the developer have agreed to redevelop the property. But equally, the Bank cannot insist that the whole redevelopment should remain stopped when its security can otherwise be protected in the redeveloped property.”

Further, the Bench referred to the Privy Council's decision in K.B. Seth v. Dwarkadas Ranchhoddas, Seth & Others, 1932 SCC OnLine PC 33, which held that where a mortgagee or another person with a limited interest in property derives a benefit by exercising that interest, the benefit cannot be dealt with in a manner that defeats the rights of others having an interest in the property.

Moreover, it held that the additional area arising from the redevelopment could be taken into account while determining the extent of SBI's security. However, as SBI had not agreed to the development agreement, it could not be compelled to bear the contractual cost of acquiring the additional area. 

Justice Borkar also clarified that SBI could continue to retain possession of the alternative or redeveloped premises until its outstanding dues were satisfied or a competent authority passed an order to the contrary.

Accordingly, the High Court disposed of the petition.