The Need for Consistency: Why Banks Must Respect the Banking Principles to Retain Judicial Confidence

Institutional Flip-Flop by Public Sector Banks under SARFAESI and IBC – Over the years, the banking industry in India has fought long and hard battles to secure judicial clarity on critical issues that directly impact recovery of dues. From the validity and scope of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002), priority of secured creditor and first charge holder, the criminal liability of dishonour of cheques under Section 138 of the Negotiable Instruments Act, 1881, to the invocation of guarantees and the principle that the liability of a guarantor is independent of the borrower’s liability under the Insolvency and Bankruptcy Code (IBC),  each of these milestones was achieved only after sustained litigation before various forums, including the Supreme Court. These settled principles now form the backbone of creditor rights in India. Yet, ironically, there are instances where the very institutions that fought to establish these positions, public sector banks and financial institutions, have themselves attempted to reverse or dilute them when it suited their immediate case strategy. This not only reflects a short-term vision but also suggests that the pressure of obstacles created by defaulting borrowers in recovery proceedings sometimes compels banks to act contrary to the very legal doctrines they worked so hard to establish.

Over the past two decades, banks have fought long and arduous battles to secure clarity under statutes like the SARFAESI Act, 2002 and later under the Insolvency and Bankruptcy Code, 2016 (IBC). These efforts led to the Supreme Court laying down firm principles that restricted unwarranted judicial interference and gave primacy to statutory mechanisms such as DRT/DRAT under SARFAESI, and the Committee of Creditors (CoC) under IBC.

When the SARFAESI Act, 2002 was enacted, it gave banks unprecedented powers to enforce security interests without the intervention of courts. However, the implementation phase was marred by frequent challenges in civil courts and writ petitions before High Courts, which threatened to erode the effectiveness of the law. Banks had to engage in prolonged litigation, culminating in the landmark judgment in Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311, where the Supreme Court upheld the constitutional validity of the Act and clarified the remedies available to borrowers. This was followed by other judgments such as United Bank of India v. Satyawati Tondon (2010) 8 SCC 110, where the Supreme Court categorically cautioned High Courts against interfering under Article 226 when the statute had provided a complete mechanism of appeal before the DRT and DRAT, by observing “It is a matter of serious concern that despite repeated pronouncement of this Court, the High Courts continue to ignore the availability of statutory remedies under the DRT Act and SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impact on the right of banks and other financial institutions to recover their dues. We hope and trust that in future the High Courts will exercise their discretion in such matters with greater caution, care and circumspection.”. In fact, over time, the Supreme Court consistently advised the High Courts to show restraint in exercising writ jurisdiction in SARFAESI and IBC matters.

The irony, however, lies in the fact that banks themselves have at times attempted to turn the clock back by taking stands which suits their position in a particular case. The most recent example is the case of Mohammad Zubair Ahmad v. Punjab National Bank (SLP (C) 7273/2025), where, instead of pursuing remedies under SARFAESI, the bank filed a writ petition before the Allahabad High Court. The matter reached the Supreme Court, which expressed strong displeasure at the conduct of the bank, compelled the personal appearance of its top executives, and directed the Bank to withdraw the writ within 48 hours. The Court went further to record its dismay at a questionable settlement in Lok Adalat and warned that financial institutions must not themselves invoke writ jurisdiction when the statutory framework clearly points to the DRT as the proper forum. What is striking here is not just the legal strategy but the institutional paradox.

A similar pattern of inconsistency is visible under the Insolvency and Bankruptcy Code, 2016 (IBC), particularly in matters of priority of charges under Section 53. In banking practice, the arrangement is well-settled: working capital lenders generally hold the first charge on current assets and, subject to agreement, a second charge on fixed assets; term lenders, in turn, hold the first charge on fixed assets, with the working capital banks expressly ceding priority. Despite these inter-se agreements, several cases have emerged where second charge holders claim parity with first charge holders during distribution under the IBC, arguing that they too are “secured creditors.” Such claims disregard not only the contractual arrangements but also settled judicial principles.

Due to inconsistent stands taken by the bank on the issue, distribution of resolution amounts among secured creditors has become another contentious issue, with banks often taking inconsistent positions, initially agreeing to inter-creditor security sharing, but later disregarding these arrangements under IBC to improve their recoveries. This has led to disputes, particularly where majority lenders in the CoC have used voting powers to sideline minority creditors’ rights under Sections 30(2)(b) and 53(1) of the IBC. Divergent rulings by the NCLT, NCLAT, and Supreme Court in cases such as Technology Development Board v. Anil Goel, Kotak Mahindra Bank v. Technology Development Board, India Resurgence ARC v. Amit Metaliks, and DBS Bank v. Ruchi Soya have deepened the controversy, with the matter now referred to a larger bench.

While litigation strategy can sometimes be shaped by case-specific facts, what is concerning is when banks themselves challenge settled legal positions that the industry as a whole had painstakingly fought to settle after years of struggle before the highest courts of the country. This flip-flop not only weakens the institutional credibility of the banking sector but also undermines the certainty and stability of jurisprudence, thereby affecting recovery prospects and public confidence.

The Hon’ble Supreme Court in ICICI Bank v. SIDCO Leathers Ltd. (2006) 10 SCC 452 had upheld that priorities arising out of inter-se agreements must be respected. The NCLAT in Technology Development Board v. Anil Goel (RP, Bharati Defence) (now before the Supreme Court) reiterated that second charge holders cannot demand equality with first charge holders in disregard of their agreed position. The debate is further reinforced by the fact that both the Insolvency Law Committee and the World Bank have recommended that the priority rights of prior charge holders must be respected. Recognition of such inter-se priorities is critical not only for ensuring fairness in distribution but also for the smooth evaluation of security value and security coverage ratios by lenders. If these priorities are ignored or subjected to constant challenge, it could undermine the very basis on which banks conduct credit appraisal and risk assessment, thereby creating significant uncertainty in lending practices and weakening confidence in the recovery framework under the IBC.

Yet, banks frequently switch their stand: when they are first charge holders, they insist on priority; when they are second charge holders, they claim parity. This opportunistic flip-flop leads to avoidable litigation, delays resolution, and erodes value for all stakeholders.  The consequences of such inconsistent approaches are severe. They undermine legal certainty, create unnecessary disputes, and increase litigation costs, thereby reducing ultimate recovery. More importantly, they project a picture where short-term gains in individual cases are prioritised over long-term stability of jurisprudence. This might also impact the credibility of the banks before courts.

What is required now is a course correction. Public sector banks must adopt a consistent approach aligned with settled law, even if in a given case it causes some disadvantage. Respecting inter-se agreements, refraining from opportunistic litigation, and strengthening internal policies to ensure uniformity in legal positions are essential steps. Regulators such as the RBI and the Department of Financial Services (DFS) should also consider issuing policy directions mandating consistency in legal strategies.

The struggle of the banking industry to secure judicial clarity under SARFAESI and IBC was long, arduous, and costly. For banks themselves to challenge those settled legal positions is not only paradoxical but also detrimental to the very framework that protects their interests. Institutional maturity demands that banks look beyond short-term litigation strategy and respect the legal doctrines that the industry collectively fought to establish. Only then can the objectives of financial stability, effective resolution, and creditor confidence be truly achieved.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at   insights@elp-in.com or write to our authors:      

Mukesh Chand, Senior Counsel – Email – mukeshchand@elp-in.com