SARFAESI Rights Cannot Override Lessor's Right To Re-Enter Leased Land For Breach: Madras High Court

The Madras High Court on 29 July held that enforcement powers available to a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act cannot override a lessor's contractual right to cancel a lease and resume possession of industrial land for breach of lease conditions.

A Division Bench comprising Chief Justice Arvind Dharmadhikari and Justice G. Arul Murugan dismissed Karur Vysya Bank's petition challenging the State Industries Promotion Corporation of Tamil Nadu Limited's (SIPCOT) cancellation of an industrial plot allotted to its borrower ABC Apparels Private Limited. It held:

“It is a fundamental principle of public law that the extraordinary remedy under Article 226 of the Constitution cannot be turned into a forum for resolving pure contractual disputes.”

The dispute concerned an industrial plot allotted by SIPCOT to ABC Apparels under a 99 year lease. In 2015, with SIPCOT's consent, ABC Apparels mortgaged its leasehold rights in the property to Karur Vysya Bank as security for an overdraft facility of Rs. 10 crore.

After ABC Apparels defaulted on repayment, Karur Vysya Bank classified the account as a non performing asset and initiated recovery proceedings under the SARFAESI Act, which permits secured creditors to enforce security interests without first approaching a court. The Bank took symbolic possession of the property and issued an e-auction notice to recover its dues. Meanwhile, SIPCOT alleged that ABC Apparels had breached the conditions of the allotment and lease deed. It cancelled the allotment and directed execution of a surrender deed for resumption of the industrial plot.

Challenging SIPCOT's action, Karur Vysya Bank approached the High Court and argued that its rights as a secured creditor under the SARFAESI Act prevailed over SIPCOT's action. SIPCOT contended that the dispute arose from contractual lease conditions and that its right to terminate the lease upon breach could not be overridden by the SARFAESI Act.

The Court considered whether a writ petition under Article 226 of the Constitution could be maintained against a contractual termination and whether the Bank's rights under the SARFAESI Act overrode SIPCOT's contractual right to re-enter the property upon breach of lease conditions. It answered both issues against Karur Vysya Bank, and held that disputes relating to cancellation of a lease and resumption of land are rooted in contractual terms and cannot ordinarily be decided in writ proceedings.

Further, the Bench held that Karur Vysya Bank had stepped into the shoes of ABC Apparels and could not claim rights greater than those available to the borrower under the lease deed. Referring to the principle of nemo dat quod non habet (a person cannot transfer a better title than they possess), the Bench held that the Bank was bound by the terms of the lease deed, including the clause permitting cancellation of allotment for breach of conditions.

It rejected the Bank's reliance on Section 13(4) of the SARFAESI Act, which empowers secured creditors to take measures for enforcing security interests, the Court held that the provision does not extinguish a lessor's contractual right of re-entry. It observed:

“The enforcement powers of a secured creditor under the SARFAESI Act are exercisable only against the security interest created by the borrower. Where the security interest is merely a mortgage of leasehold rights, such mortgage remains intrinsically subject to the underlying terms, conditions and forfeiture clauses of the primary lease deed. Statutory enforcement measures under the SARFAESI Act do not override the primary lessor's contractual right of re-entry for gross breach of lease terms.”

The Bench further emphasised the public purpose behind industrial land allotments by State development agencies and held:

“Industrial plots allotted by State developmental agencies like SIPCOT are public resources meant to generate employment, foster industrialization and boost regional economy. Allowing a commercial lender or asset reconstruction company to lock up prime public industrial land indefinitely, while failing to find a buyer for nearly a decade, grossly subverts public interest.”

Accordingly, the High Court dismissed Karur Vysya Bank's writ petition.

For Petitioner: Advocate R Umasuthan

For Respondents: Advocate Abishek Murthy, Standing Counsel