Section 31 of the SARFAESI Act: Scope, Exemptions, and Judicial Interpretation

Section 31 of the SARFAESI Act: Scope, Exemptions, and Judicial Interpretation

Introduction

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) revolutionised debt recovery in India by enabling extra-curial enforcement of security interests. While the Act confers wide powers on secured creditors under Chapter III (particularly Sections 13 and 14), Parliament consciously circumscribed its reach through Section 31, which excludes ten classes of transactions from the Act’s operation. These exemptions play a pivotal role in balancing creditor rights with socio-economic considerations and the integrity of other statutory regimes. This article critically analyses Section 31, traces its legislative purpose, and evaluates judicial interpretation with particular emphasis on recent case law.

Statutory Framework

Text and Structure of Section 31

Section 31 provides that “the provisions of this Act shall not apply to” the categories in clauses (a)–(j), inter alia:

  • Liens, pledges, or security interests in aircraft and vessels (cls. (a)–(c));
  • Conditional sales, hire-purchase or lease agreements (cl. (d));
  • Rights of unpaid sellers (cl. (e));
  • Securities governed by the State Financial Corporations Act, 1951 (cl. (f));
  • Any security interest for unpaid purchase price of equipment (cl. (g));
  • Securities in agricultural land (cl. (i)); and
  • “Any case in which the amount due is less than twenty per cent of the principal amount and interest thereon” (cl. (j)).

Two features are notable: (1) the section is couched in absolute terms—“shall not apply”—signifying complete exclusion; and (2) Section 31 is located immediately after Section 30 (appeal to the Appellate Tribunal) and before Section 32 (protection of action taken in good faith), indicating its role as a substantive limitation rather than a procedural safeguard.

Relationship with Sections 35 and 37

Although Section 35 contains a sweeping non-obstante clause declaring the SARFAESI Act to prevail “notwithstanding anything inconsistent therewith contained in any other law”, Section 31 qualifies that primacy by withdrawing specified subject-matters from the Act’s field of operation. Further, Section 37 clarifies that SARFAESI is “in addition to and not in derogation of” certain special statutes (e.g., the Recovery of Debts and Bankruptcy Act, 1993). The combined reading suggests a legislative hierarchy: Section 31 exclusions → SARFAESI inapplicable; elsewhere SARFAESI prevails over inconsistent laws by virtue of Section 35.[1]

Legislative Purpose of Section 31

Parliament’s aim was twofold. First, to protect commercial arrangements already regulated by specialised legislation (e.g., aviation, shipping, hire-purchase) from dual regulatory burdens. Second, to shield vulnerable sectors, notably agriculture, from coercive recovery mechanisms. The Narasimham Committee Report II (1998) and the Andhyarujina Committee Report (1999)— precursors to the SARFAESI Act—explicitly recommended excluding agricultural land to avoid disruption of food security and rural credit markets.

Key Doctrinal Issues

(A) Meaning of “Agricultural Land” – Clause (i)

The exemption for agricultural land has generated the bulk of litigation under Section 31. Courts have evolved a functional test: whether the secured asset was actually put to agricultural use on the date of creation of the security interest. In Concern Readymix v. Corporation Bank (2018, Tel HC) the borrower argued that the mortgaged property was agricultural and thus immune. The Court rejected the plea, stressing evidentiary burden and observing that the asset had been offered as collateral for an industrial term loan.[2] Similarly, in Ummer K v. Urban Co-operative Bank (DRT 2024) the Tribunal applied the Supreme Court’s dicta in K. Sreedhar v. Raus Constructions (2023) to hold that only land actually used for agriculture qualifies.[3]

Contrast this with the Karnataka High Court’s reasoning in Neria Estates Rural Industries (2024), where the Court declined exemption because the land lacked “agricultural character” notwithstanding its classification in revenue records.[4] The cases reveal a jurisprudential shift from formal (land-revenue) tests to substantive use-based analysis, thereby narrowing the protective ambit of clause (i).

(B) Monetary Threshold – Clause (j)

Clause (j) excludes cases where the “amount due” is less than 20 percent of the principal and interest. While seldom litigated, the provision surfaced before the DRT in P.V. Pavan Kumar v. Canara Bank (2019), where the borrower contended that the outstanding fell below the statutory threshold. The Tribunal dismissed the contention after calculating the aggregate dues, emphasising that the threshold applies at the time of invocation of Section 13(2).[5] No appellate authority has yet authoritatively determined whether subsequent payments reducing exposure below 20 percent divest the creditor of SARFAESI remedies—a doctrinal lacuna warranting clarification.

(C) Overlap with Special Statutes

Conflicts between SARFAESI and other special laws arise chiefly through Section 35 versus the explicit carve-outs in Section 31. The Supreme Court’s decision in UCO Bank v. Dipak Debbarma (2017) addressed overlap with a land-reform statute, holding that SARFAESI prevails owing to its Union-list pedigree.[6] However, because agricultural land is specifically exempted under Section 31(i), the ratio in Dipak Debbarma cannot override the exemption. Accordingly, where a secured creditor seeks to enforce a mortgage on agricultural land, Section 31(i) trumps Section 35; where the asset is non-agricultural but state law restricts alienation, Dipak Debbarma restores SARFAESI supremacy.

Judicial Treatment of Section 31 in the Supreme Court and High Courts

1. Mardia Chemicals Ltd. v. Union of India (2004)

While upholding the constitutionality of SARFAESI, the Court noted that Section 31 reflects “careful legislative calibration” to avoid excessive encroachment on other regimes.[7] This observation influences subsequent purposive interpretation—courts presume that Section 31 exceptions are exhaustive and not illustrative.

2. Standard Chartered Bank v. V. Noble Kumar (2013)

The Supreme Court did not directly apply Section 31, yet its affirmation that creditors may directly invoke Section 14 without exhausting Section 13(4) underscores the expansive remedial framework subject to Section 31 exclusions.[8]

3. Authorised Officer, Indian Overseas Bank v. Ashok Saw Mill (2009)

The Court enlarged the Debts Recovery Tribunal’s jurisdiction to scrutinise all creditor actions post-possession. Consequently, even in matters falling within Section 31, borrowers may invoke DRT jurisdiction if creditors erroneously proceed under SARFAESI; the DRT can annul such proceedings for lack of applicability.[9]

4. High Court Trends on Clause (i)

  • Akola Oil Industries v. State Bank of Maharashtra (Bom HC 2005) recognised the legislative decision to immunise agricultural land and cautioned creditors to ascertain land-use status before issuing Section 13(2) notices.[10]
  • Concern Readymix and Neria Estates (supra) illustrate divergent evidentiary approaches—while the Telangana High Court relied on multiple failed e-auction notices to negate the borrower’s bona fides, the Karnataka High Court employed a categorical examination of land-use certificates.

Interplay with Insolvency Framework

Although Section 31 does not expressly reference the Insolvency and Bankruptcy Code, 2016 (IBC), its exclusions influence creditor strategy during corporate insolvency. For instance, security over aircraft or vessels (cl. (b)–(c))—often critical to shipping and aviation insolvencies—cannot be enforced through SARFAESI and therefore follow the IBC waterfall endorsed in PVVNL v. Raman Ispat (2023).[11] The Supreme Court’s reaffirmation of IBC primacy aligns with legislative intent that Section 31 exclusions revert to ordinary or special laws, not to vacuum.

Policy Discussion and Reform Prospects

Empirical data from the Reserve Bank of India reveal that agricultural NPAs remain significant, yet creditors rarely attempt SARFAESI enforcement owing to Section 31(i). Some commentators argue that modern commercial agriculture requires access to efficient recovery mechanisms. A possible reform is to replace the categorical exclusion with a value-threshold or small-holder criterion, balancing farm security with credit culture. Conversely, any dilution risks social backlash and constitutional litigation under Article 21 (right to livelihood).

Regarding clause (j), inflation has eroded the relevance of the 20 percent threshold, especially for high-value loans. A static percentage without a de minimis floor (e.g., ₹10 lakh) may incentivise strategic default. Legislative review is therefore warranted.

Conclusion

Section 31 serves as a crucial safety valve within the SARFAESI architecture, shielding sensitive sectors and specialised transactions from the sweeping self-help remedies otherwise available to secured creditors. Judicial interpretation has largely preserved the integrity of the exemptions while preventing their misuse by borrowers. The emerging jurisprudence—particularly on agricultural land— fosters a nuanced, evidence-based approach that aligns with economic realities without undermining statutory purpose. Future reforms should aim at recalibrating monetary thresholds and clarifying overlaps with the IBC, while retaining the delicate balance between creditor efficiency and social justice that underpins Section 31.

Footnotes

  1. See Akola Oil Industries v. State Bank of Maharashtra, 2005 SCC OnLine Bom 478 (discussing the interaction between Sections 35, 37 and 31).
  2. Concern Readymix v. Authorised Officer, Corporation Bank, 2018 SCC OnLine Hyd 783.
  3. Ummer K v. Urban Co-operative Bank, DRT Order 2024; relying on K. Sreedhar v. Raus Constructions Pvt. Ltd., (2023) 1 SCC 130.
  4. M/s Neria Estates Rural Industries v. State of Karnataka, 2024 SCC OnLine Kar —.
  5. P.V. Pavan Kumar v. Canara Bank, DRT Hyderabad 2019.
  6. UCO Bank v. Dipak Debbarma, (2017) 2 SCC 585.
  7. Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311.
  8. Standard Chartered Bank v. V. Noble Kumar, (2013) 9 SCC 620.
  9. Authorised Officer, Indian Overseas Bank v. Ashok Saw Mill, (2009) 8 SCC 366.
  10. Akola Oil Industries v. State Bank of Maharashtra, supra.
  11. Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., 2023 SCC OnLine SC 842.