In a significant ruling, the Karnataka High Court has held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) will override the provisions of the Foreign Exchange Management Act (FEMA). The case, titled Canara Bank v. Commissioner of Customs & Others (Writ Petition No. 10895 of 2023), was presided over by Justice S.R. Krishna Kumar.
Legal Issues
The primary legal issue in this case was whether the SARFAESI Act, a later enactment, would take precedence over FEMA, an earlier enactment, in matters concerning the recovery of debts by secured creditors. The petitioner, Canara Bank, contended that the mortgage created in favor of the bank on February 20, 2015, should have priority over any subsequent claims under FEMA, particularly since Section 37A of FEMA, which provides for the seizure of properties, came into force only on September 9, 2015.
Court’s Decision
Justice S.R. Krishna Kumar quashed the impugned order dated March 31, 2022, passed by the Assistant Director, Directorate of Enforcement, which had directed the seizure of the property mortgaged to Canara Bank. The court directed the respondent to release the mortgaged property to the petitioner within four weeks.
Important Observations of the Court
Justice Krishna Kumar made several critical observations in his judgment:
1. Priority of Secured Creditors: “The provisions of the SARFAESI Act would prevail over the provisions of other earlier enactments, under which amounts are allegedly due to the Central Government. In the instant case, it cannot be gainsaid that the FEMA (a special law/Act) is an earlier enactment, while the SARFAESI Act (a special law/Act) is a later/subsequent enactment which would prevail over FEMA.”
2. Jurisdiction and Authority: “The impugned order purporting to seize/attach the schedule property for alleged dues under FEMA are clearly without jurisdiction or authority of law, inasmuch as since the schedule property had already been mortgaged in favor of the petitioner โ Bank by the 3rd respondent (Ahmed), prior to the impugned order, the 2nd respondent (ED) was neither entitled to nor empowered to pass the impugned order of seizure/attachment of the property which had already stood mortgaged in favor of the petitioner prior to the impugned order.”
3. Alternative Remedies: The court also addressed the respondents’ argument regarding the availability of alternative remedies under Section 37A(5) of FEMA, stating, “The mere availability of a remedy by way of an appeal cannot be construed or treated as denuding this Court of its jurisdiction under Article 226 of the Constitution of India.”
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Parties Involved
Petitioner: Canara Bank, ARM Branch, Circle Office Building, Balmatta Road, Mangaluru, represented by Senior Counsel Dhyan Chinnappa and Advocate Shetty Vignesh Shivaram.
Respondents:The Commissioner of Customs, Chennai, represented by DSGI H. Shanthi Bhushan.
