Supreme Court Upholds Applicability of SARFAESI Act in Jammu & Kashmir, Overruling State High Court Judgment

SC clarifies legislative competence of Parliament under Article 370, affirms SARFAESI Act's supremacy over conflicting state laws on banking and debt recovery in J&K.

In a landmark verdict delivered on December 16, 2016, the Supreme Court of India decisively ruled that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is fully applicable in the State of Jammu & Kashmir. The bench comprising Justices Kurian Joseph and R.F. Nariman overturned the earlier judgment of the Jammu & Kashmir High Court which had held key provisions of the SARFAESI Act beyond the legislative competence of the Parliament of India.

The dispute arose from the High Court’s contention that provisions of SARFAESI, particularly Sections 13(1) and 13(4), clashed with Section 140 of the Jammu & Kashmir Transfer of Property Act, 1920, which restricts the transfer of immovable property to permanent residents of the State. The High Court had consequently ruled that the SARFAESI Act could not be enforced against residents of Jammu & Kashmir, effectively exempting banks like State Bank of India from its operation in the State.

The Supreme Court’s judgment, however, emphatically rejected this view by thoroughly analyzing the unique constitutional framework applicable to Jammu & Kashmir under Article 370 of the Constitution of India and the Constitution of Jammu & Kashmir, 1956. The Court affirmed that while Jammu & Kashmir enjoys special status and its own Constitution, it remains an integral part of India with a quasi-federal structure. The Constitution of India, as modified by Presidential Orders under Article 370, extends many provisions of the Indian Constitution, including Entry 45 (Banking) and Entry 95 (Jurisdiction of courts) of List I of the Seventh Schedule, to the State.

The Court highlighted that SARFAESI is enacted under Entry 45 read with Entry 95 of List I, which vest exclusive legislative competence in Parliament for matters relating to banking and associated judicial powers. The Act’s pith and substance relate to recovery of debts by banks — an inseparable function of banking — and not merely to transfer of property. Thus, SARFAESI’s provisions supersede any conflicting state laws, including restrictions under Section 140 of the Jammu & Kashmir Transfer of Property Act, as per Article 246 of the Constitution.

Further, the Court noted that the State’s own laws, including Section 140, expressly exempt mortgages in favor of scheduled banks and public financial institutions, and the SARFAESI Rules (Rule 8(5)) also preserve the applicability of such State provisions in case of sale of immovable property in Jammu & Kashmir. This harmonization negates any direct conflict.

The Court repudiated arguments that the Constitution of Jammu & Kashmir and the Constitution of India enjoy equal status or that the Parliament requires the State Government’s concurrence every time it enacts legislation under Article 370. It underscored that once a matter is specified by a Presidential Order under Article 370 as falling within the Union List or Concurrent List, Parliament’s law applies without further concurrence.

In a significant constitutional interpretation, the Court clarified that the State Legislature’s power under Section 5 of the Jammu & Kashmir Constitution extends only to matters not covered by Parliament. Therefore, where Parliament has exclusive jurisdiction under Entry 45 and 95 of List I, State laws must yield.

The Supreme Court also addressed the invocation of Article 35A by the respondents, which protects permanent residents’ special rights. The Court found that Article 35A does not invalidate the SARFAESI Act’s operation, as it preserves State laws conferring special rights but does not affect Parliament’s exclusive power over banking laws.

In conclusion, the Supreme Court set aside the High Court judgment, holding that the SARFAESI Act applies in Jammu & Kashmir and that banks’ actions under the Act, including notices and enforcement measures, are valid and enforceable. This ruling affirms the legislative supremacy of Parliament in banking and debt recovery matters in Jammu & Kashmir, harmonizing the special constitutional provisions with the need for uniform financial laws across India.

The appeals filed by the State Bank of India and others were thus allowed, with no order as to costs.

Statutory provisions

Article 1, Article 246, Article 248, Article 254, Article 268, Article 270, Article 370, Article 368, Article 35A of the Constitution of India; Sections 13, 17A, 18B, 34, 35, 36 of the SARFAESI Act, 2002; Section 140 of the Jammu & Kashmir Transfer of Property Act, 1920; Sections 3, 5, 6, 10, 147 of the Constitution of Jammu & Kashmir, 1956; Rule 8(5) of the SARFAESI Rules, 2002.

State Bank of India v. Santosh Gupta (SC) : Law Finder Doc Id # 813963