Secured creditors cannot claim priority over attached properties under Depositor Protection Statute, rules Karnataka High Court
In a significant ruling, the Karnataka High Court has reinforced the supremacy of the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (KPIDFE Act) over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The court dismissed an appeal by Canara Bank, which contested an order by the Special Court making absolute the attachment of properties under the KPIDFE Act, despite the bank holding a prior charge on them.
The case revolved around M/s. The Krantiveera Sangolli Rayanna Urban Co-operative Society Limited, which had mortgaged properties to Canara Bank. These properties were later attached under the KPIDFE Act due to financial irregularities. Canara Bank argued that its prior charge under the SARFAESI Act should take precedence. However, the High Court, led by Justices Anu Sivaraman and Venkatesh Naik T, held that the KPIDFE Act's provisions override those of the SARFAESI Act, echoing a precedent set by the Supreme Court.
The bench referenced the Supreme Court's decision in the National Spot Exchange Limited case, asserting that secured creditors cannot claim priority over properties attached under a Depositor Protection Statute. The court also addressed the bank's contention regarding the condonation of a 63-day delay in filing the application under the KPIDFE Act. It upheld the Special Court's power to condone such delays, citing the applicability of the Limitation Act, 1963, to proceedings under the KPIDFE Act.
The judgment emphasized that Canara Bank had constructive notice of the property attachment and could have approached the Special Court for inclusion in the proceedings, as per Section 12(3) of the KPIDFE Act. The bank's failure to do so precluded it from challenging the order later.
This ruling reaffirms the protective measures for depositors under the KPIDFE Act, ensuring that their interests are prioritized over secured creditors. The decision is expected to have significant implications for financial institutions and their dealings with properties subject to depositor protection statutes.
Bottom line:-
Under the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004 (KPIDFE Act), the provisions of the Act will have overriding effect over claims made under the SARFAESI Act. Secured creditors cannot claim priority over properties attached under a Depositor Protection Statute.
Statutory provision(s): Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004, SARFAESI Act, 2002, Limitation Act, 1963
