Karnataka High Court Holds KPIDFE Act, Like MPID, Has Priority Over SARFAESI Claims

The Karnataka High Court has held that secured creditors cannot claim priority under the SARFAESI Act over properties attached under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (KPIDFE Act), and such attachment would prevail in determining the priority of claims.

A coram of Justice Lalitha Kanneganti dismissed a writ petition filed by Canara Bank challenging the refusal of the Sub-Registrar to register a sale certificate issued in favour of an auction purchaser.

Canara Bank had sanctioned a housing loan of Rs 2.32 crore in 2020 to the borrower, secured by a mortgage of a residential property.

After the borrower defaulted, the account was classified as a Non-Performing Asset, prompting the bank to initiate recovery proceedings under the SARFAESI Act.

The secured property was eventually put up for auction and sold for Rs 7.10 crore, following which a sale certificate was issued in favour of the successful bidder.

When the purchaser approached for registration, the Sub-Registrar declined to process the sale certificate. The refusal was based on a prior gazette notification dated March 15, 2023 issued under the KPIDFE Act, as well as a subsequent direction restraining registration of the property.

This led the bank to move the High Court.

Before the court, the bank argued that its secured interest, created under the SARFAESI framework, would take precedence over any later attachment under the KPIDFE Act. On that basis, it maintained that the Sub-Registrar's refusal to register the sale certificate was untenable.

The competent authority, however, took a different view. It emphasised that the KPIDFE Act is a welfare legislation intended to safeguard depositors and that the attachment was necessary to prevent any transfer or dilution of the asset pending recovery.

Referring to the Supreme Court's decision in National Spot Exchange Ltd. v. Union of India, the Court noted that the issue of priority between secured creditors and properties attached under depositor-protection statutes had already been settled.

Observing that the KPIDFE Act is pari materia with the Maharashtra Protection of Investors and Depositors Act, 1999, considered by the Supreme Court, the Court held:

“In the light of the authoritative pronouncement of the judgment of the Apex Court in the above case, the MPID Act which is pari materia with that of the KPIDFE Act, the issue is no more res integra and the KPIDFE Act will have the priority over the SARFAESI Act.”

Accordingly, the court declined to interfere with the refusal to register the sale certificate and dismissed the writ petition.

For Petitioner: Advocate Shetty Vignesh Shivaram

For Respondents: Advocates Mahantesh Shettar, Veeresh Budihal and Swaroop S