SAFEMA Tribunal rules that a bank’s SARFAESI security interest cannot override benami property attachment, reinforcing the priority of the Benami Property Transactions Act.
The Appellate Tribunal under SAFEMA, New Delhi, has delivered an important ruling concerning the conflict between benami property attachment proceedings and the rights of secured creditors under the SARFAESI Act.
In State Bank of India v. The Initiating Officer, Bhopal [FPA-PBPT-840/BPL/2019], the Tribunal held that a bank cannot seek release of a property declared benami merely because the property had been mortgaged to it as collateral security. The Tribunal emphasised that permitting such a claim could defeat the very purpose of the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act).
Background of the Case
The dispute related to Flat B-304, Blue Berry Apartment, DB City, Gwalior. The property was registered in the name of Surendra Kumar Agrawal, but the authorities concluded that Sandeep Mangal alias Sonu Mangal was the actual beneficial owner.
According to the findings recorded in the proceedings, the flat had initially been booked in Sandeep Mangal’s name. He was involved in negotiations concerning its purchase and had made payments towards the property and its housing loan.
The authorities also questioned the financial capacity of the registered owner, Surendra Kumar Agrawal, who reportedly had a monthly income of only around ₹5,000–₹7,000 and, according to the findings, did not appear financially capable of acquiring the property.
The property subsequently became part of the security offered to State Bank of India (SBI) for a term loan of approximately ₹2.28 crore granted to Maa Kaila Devi Developers and Hotels Pvt. Ltd., in which Sandeep Mangal was a director.
Benami Attachment and SBI’s Objection
The Initiating Officer provisionally attached the property under the Prohibition of Benami Property Transactions Act, 1988. The Adjudicating Authority subsequently confirmed the attachment.
SBI challenged the confirmation before the SAFEMA Tribunal.
The bank raised, among other grounds, the contention that it had not been provided an adequate opportunity to participate in the benami proceedings. SBI also relied upon Section 26-E of the SARFAESI Act, which provides priority to registered secured creditors in relation to enforcement of security interests, subject to the statutory framework.
The bank argued that its security interest had been created and registered before the attachment and therefore its rights should take precedence over the subsequent attachment of the property.
Tribunal Rejects SBI’s Natural Justice Argument
The Tribunal first examined SBI’s contention that it had not received proper notice of the proceedings.
The Tribunal found that SBI was aware of the benami adjudication. The bank had itself initiated recovery proceedings under the SARFAESI Act through notices issued in December 2018 and March 2019. It had also submitted a representation before the concerned authorities in April 2019.
Further, the Tribunal noted that the relevant notice under Section 26(1), the reference under Section 24(5), and the relied-upon documents had been sent to SBI by speed post.
Consequently, the Tribunal concluded that the bank had sufficient knowledge of the proceedings and an opportunity to assert its interest in the property. Its objection based on lack of notice was therefore rejected.
SARFAESI Security Interest Cannot Defeat Benami Attachment
The central question before the Tribunal was whether the mortgaged property could be released from benami attachment because SBI possessed a security interest over it.
The Tribunal answered the question in the negative.
It observed that attachment under the Benami Act is fundamentally different from an ordinary debt-recovery measure. The purpose of provisional attachment is to preserve the property during proceedings that may ultimately lead to confiscation of the benami property by the Central Government.
The Tribunal referred to Section 27 of the PBPT Act, which deals with confiscation of benami property. Importantly, Section 27(4) provides that a right created in favour of a third person, where such right is intended to defeat the purposes of the Benami Act, is null and void.
Therefore, the existence of a mortgage in favour of a bank does not automatically require the authorities to release a property that has been validly determined to be benami.
Tribunal Highlights Possibility of Abuse
The Tribunal was particularly concerned about the consequences of accepting the bank’s argument.
If a person could retain the benefit of benami property simply by mortgaging it to a financial institution after the property came under scrutiny, the statutory prohibition against benami transactions could potentially be circumvented.
According to the Tribunal, such an interpretation could create a mechanism whereby an unscrupulous person acquires property through a benami arrangement, subsequently creates a mortgage over it and, after default, enables the secured creditor to claim priority over the property.
This, in the Tribunal’s view, would undermine the objective and effectiveness of the Benami Act.
Bank Directed to Pursue Other Securities
The Tribunal also considered the fact that SBI was not without remedies for recovery of its outstanding dues.
The loan transaction was supported by other securities, including two additional properties and personal guarantees furnished in connection with the loan.
The Tribunal identified a commercial shop at Ashiya Plaza, Gwalior, and a flat at Purushottam Vihar Colony, Gwalior, as other securities available to the bank.
It therefore held that SBI should first exercise its recovery rights against those securities.
The Tribunal nevertheless protected the bank’s legitimate recovery interest by granting liberty to SBI to approach the Adjudicating Authority under the relevant provisions of the Benami Act if the bank remained unable to recover its entire outstanding amount from the other securities.
Key Legal Principle
The decision establishes an important principle concerning the interaction between SARFAESI proceedings and benami property attachment:
A bank’s security interest under SARFAESI does not, by itself, entitle it to obtain release of property that has been validly attached and determined to be benami.
The ruling underscores that the objective of the Benami Act is not merely recovery of government dues. It seeks to prevent persons from retaining or enjoying property acquired through prohibited benami arrangements.
Accordingly, secured-creditor rights cannot be interpreted in a manner that permits the statutory prohibition against benami transactions to be defeated.
Implications for Banks and Financial Institutions
The ruling carries significant implications for banks, NBFCs and other secured lenders.
Financial institutions accepting immovable property as collateral must conduct appropriate due diligence regarding the ownership, beneficial interest and source of acquisition of the property.
A registered title in the name of one person may not necessarily settle questions concerning beneficial ownership where proceedings under the Benami Act are subsequently initiated.
The decision also demonstrates that priority under SARFAESI cannot be viewed in isolation from other statutory regimes. Where a property is subject to a statutory confiscation mechanism under the Benami Act, the secured creditor may face restrictions notwithstanding the existence of a registered security interest.
Conclusion
The SAFEMA Tribunal’s ruling in State Bank of India v. The Initiating Officer, Bhopal reinforces the principle that a security interest cannot be used as a shield to defeat the statutory consequences attached to benami property.
The Tribunal balanced the competing interests by refusing to release the attached property while allowing SBI to pursue other available securities and, if necessary, approach the Adjudicating Authority for recovery of any remaining dues.
The decision is therefore significant for banks, NBFCs, borrowers, property owners, secured creditors and legal professionals dealing with the intersection of the Benami Property Transactions Act and SARFAESI Act.
Case Details
Case: State Bank of India v. The Initiating Officer, Bhopal
Case No.: FPA-PBPT-840/BPL/2019
Forum: Appellate Tribunal under SAFEMA, New Delhi
Subject: Benami property – bank’s security interest – SARFAESI – attachment – confiscation
Decision: Appeal dismissed, with liberty to SBI to pursue other securities and statutory remedies.