Madras High Court Upholds Secured Creditors’ Priority Under SARFAESI Act

Case Update | Judgment dated 02.09.2025 | Justice N. Sathish Kumar, Madras High Court

        The Madras High Court, in a significant ruling delivered by Justice N. Sathish Kumar on 2nd September 2025, reaffirmed the supremacy of the SARFAESI Act, 2002 in matters concerning the rights of secured creditors. The Court held that once a secured interest is duly created and registered under the SARFAESI framework, the creditor’s priority will override claims made under State legislations such as the BUDS Act and TNPID Act and upheld the overriding clause of the SARFAESI Act.

        The matter arose from a writ petition filed by the City union Bank Limited, against the Economic Offences Wing (EOW), Superintendent of Police, Inspector of Police, District Crime Branch, Nagapattinam, and others, seeking to quash the letter and communication restraining the Petitioner Bank from auctioning the secured assets.

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The brief facts of the case are as follows:

        The 5th respondent (borrower) availed credit facilities from the City union Bank Ltd.,(Petitioner) to the tune of Rs.13 crore and he has mortgaged 4 immovable properties with the bank and security interest have been created in respect of the immovable properties. Thereafter, the 5th respondent (borrower) defaulted in payment of dues and the petitioner bank initiated SARFAESI proceedings over the said 4 secured interests mortgaged by the borrower.

        The Respondents i.e. the Economic Offences Wing (EOW), Superintendent of Police, Inspector of Police, District Crime Branch, Nagapattinam, and other respondents have filed an FIR and have initiated proceedings under the BUDS Act and TNPID Act.

        Subsequently, the EOW - 3rd Respondent sent a letter to the petitioner Bank not to auction the jewels of the fifth respondent since the attachment of all the movable and immovable properties is under process by the investigating agency. It was also reiterated to handover the keys of all the 4 immovable property assets which were mortgaged by the borrower to the petitioner bank.

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Issues of the case:

        The petitioner Bank approached the Honorable Madras High Court through a Writ Petition stating that he had a priority to be paid over all other debts and any attachment made in respect of the secured assets will be subject to the rights already created in favour of the secured creditor under the SARFAESI Act.

        Hence, the petitioner Bank approached the Hon’ble Madras High Court to quash the letters/communication issued in this regard by the investigating agency.

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Arguments:

        The petitioner Bank submitted that the mortgage created in favour of the petitioner as per section 26E of the SARFAESI Act the petitioner has priority right than section 12 and 13 of the BUDS Act. It was also submitted that the secured interest in favour of the bank has already been registered with CERSAI. Hence, the petitioner prayed the communication/letter directing the bank to not proceed with SARFAESI proceedings to be quashed.

        Additional public prosecutor defended that it is not sufficient to quash merely because it is created in favour of the bank and is registered with cersai.

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Court’s Findings:

Hence all the provisions were discussed and section 26E of the SARFAESI Act the deals with priority to secured creditors was also highlighted. Along with the Judgement issued by the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. and another v. Joint Commissioner of Sales Tax and another reported in (2022) SCC Online Bom 1767, has held that the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I & B Code would rank superior to the dues of the relevant department of the State Government.

The court came to a conclusion and said that "Therefore, a combined reading of the provisions stated supra and the judgment of the Full Bench of Bombay High Court makes it clear that, once a secured interest is created under SARFAESI Act and registered with the Central Registry, namely CERSAI, as required under law and as per Section 26-D of the SARFAESI Act, the secured creditor has a priority superior over all other dues."

The Court further observed that the secured interests in favour of the petitioner Bank in respect of four properties have already been registered with the Central Registry, namely CERSAI.

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Verdict:

        The Honorable Madras High Court held in favour of the petitioner bank that "As the registration has been done properly as per the Statute,Section 26-E of SARFAESI Act will come into play. The secured creditor, viz., the petitioner Bank, shall be paid in priority over all other debts. In such view of the matter, the impugned communications sent by the Investigating Agency under BUDS Act, have no force and are liable to be quashed.”

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Key Takeaways

1. SARFAESI Prevails: This judgment reaffirms that the SARFAESI Act enjoys overriding effect over State legislations in matters of secured credit enforcement.

2. CERSAI Registration Crucial: Priority under Section 26E becomes effective only when the security interest is duly registered with CERSAI.

3. Clarity for Banks: Investigating agencies cannot restrain secured creditors from enforcing mortgages when statutory priority is established.

Source: W.P. No. 20431 of 2024

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